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G. Collaborating with Innovation Partners
Innovation partners can provide skills and insights that are often needed to make
innovation projects succeed. Strategic partnering has other benefits as well. It requires firms to
Firms need a mechanism to help decide whom to partner with. Firms need to ask what
competencies they are looking for and what the innovation partner will contribute. Innovation
Discussion Question 14: What are some examples that you are familiar with of
companies that have joined forces in order to collaborate on an innovation? What was
the outcome of the collaboration?
Discussion Question 15: What are some of the reasons a company would chose to
partner on an innovation project?
Discussion Question 16: What is the downside of partnering for the purpose of product
or process innovation?
STRATEGY SPOTLIGHT 12.4 outlines how NASA is working with an innovation
partner, Innocentive, to crowdsource ideas for overcoming space exploration challenges.
Discussion Question 17: What type of fears and concerns prevent companies from using
a crowdsourcing approach to developing new products and processes? Are these fears
and concerns valid? Why or why not? If so, can a company thrive using the traditional
“closed” approach to innovation? If not, how can companies overcome their fears and
concerns?
In the SUPPLEMENT below, we discuss how pharmaceutical firms scour the globe for
new innovative compounds to solve diseases.
Extra Example: The Role of Pharmaceutical Scouts in Keeping Big Drug Firms Innovative
Sports teams have long used scouts to travel around the world looking for up and coming talent that will serve as the
future lifeblood of major league teams. Pharmaceutical firms are now following the same path, employing scouts
who travel around assessing the potential of new drugs being developed around the world and signing them to the
pharma firm’s “team” before competitors can.
In the past, large pharma firms preferred to develop drugs in house. But these firms have found limited success in
developing blockbuster new treatments to treat challenging diseases, such as diabetes, cancer, and Alzheimer’s. This
has led the firms to increasingly look to outside partners with early stage development drugs as partners. As a result,
over 1/3 of the drugs being developed in large pharma firms were initially discovered outside the firms. To
accomplish the task, the major pharma firms have developed staffs of scientists and researchers who are experts in
different diseases and technologies. They then send out these scouts to attend conferences, listen to talks, develop
relationships with researchers in small firms and university labs so that the firm can early on develop knowledge
about drugs in the early stage of development. If a drug looks promising, the pharma firm tries to strengthen the
relationship with the small firm or university lab and begin the process of making a deal to acquire or co-develop the
drug with the smaller firm.
In one example of this, Johnson & Johnson (J&J) had its eyes on a small California firm, Pharmacyclics that was
developing a new drug to treat blood cancers. The drug was so early in development that it didn’t even have a name
yet. J&J initiated a conversation with the firm about making a deal in 2010, but J&J lacked expertise in blood
cancers, and Pharmacyclics was initially skeptical of working with J&J. J&J set out to strengthen its scout team and
recruited a new researcher from a competing pharma firm, Merck. J&J sent its new scout, Peter Lebowitz, to check
out Pharmacyclics and its experimental cancer drug in early 2011. After spending three days checking out the drug
and the firm, Lebowitz emailed his boss and said “We have to get this one.” He and other J&J executives made
several trips to court the California firm and signed a deal to co-develop the drug with Pharmacyclics in December
of that year. This development deal along with others J&J has made have rejuvenated J&J’s drug portfolio. The drug
developed by the firm, now branded as Imbruvica, is now coming on the market and has shown great potential in
treating a rare lymphoma and a type of leukemia. One investment bank estimates Imbruvica will generate $1.3
billion in revenue for J&J in 2017.
Source: Rockoff, J. 2014. Pharmaceutical Scouts Seek New Star Drugs for Cancer, Diabetes. wsj.com. March 9: np.
Discussion Question 18: What other industries could use a scout team approach to
identify innovation partners?
H. The Value of Unsuccessful Innovation
This section draws on research by NYU Professor JP Eggers that challenges conventional
wisdom that there is a great deal of risk with innovations and, if firms pick the wrong
Avoid overcommitting
Pivot quickly once your realize you’ve made a mistake
Be aware that it is dangerous to be right at the outset since it often leads to complacency
II. Corporate Entrepreneurship
Corporate entrepreneurship (CE) refers to building entrepreneurial businesses within
existing corporations. It has two primary aims: the creation of new venture opportunities and
All the factors that influence the strategy implementation process —corporate culture,
leadership, features of organizational structure, and rewards and learning systems —will affect
In some large corporations, the spirit of entrepreneurship permeates every part of the
organization. It is found in companies where the strategic leaders and the culture together
Discussion Question 19: What are some examples of major corporations that have a
strong entrepreneurial spirit?
Discussion Question 20: What actions have they taken that make them entrepreneurial?
A. Focused Approaches to Corporate Entrepreneurship
Firms using a focused approach typically separate the corporate venturing activity from
Two forms —new venture groups (NVGs) and business incubators—are among the most
The SUPPLEMENT below describes one type of highly focused entrepreneurial
Extra Example: Samsung’s Intensely Focused VIP Center
Some of the most successful corporate innovators operate in a climate of intense pressure. One of these is Samsung,
the South Korean electronics maker that made a $22 billion profit in 2012 compared to a $7 billion loss for Sony, its
close competitor.
This success—and the pressure—is due in part to the role played by its VIP Center. VIP stands for Value Innovation
Program (not very important person) and it refers to a 5-story building in the heart of Samsung’s industrial complex
in Suwon, South Korea. It is completely dedicated to research, engineering and design. The first floor houses big
training rooms. Floors two through four are workrooms for various team projects. The top floor has 42 dormitory-
style rooms, each containing two beds, a shower, and a small desk. In the basement, there’s a gym and sauna as well
as ping-pong and billiards tables. In essence, it is an around-the-clock assembly line for ideas and experiments.
When an engineer or other Samsung employee is assigned there, they know they will be there until the particular
problem they are working on is solved. “When people are told they have to come here,” says Sun Woo Song, a
senior engineer and project leader at the VIP Center, “they know they have to come up with results in a very, very
short time.” As a result, the building is occupied 24 hours a day, seven days a week. Samsung has developed a set of
best practices they have put in place at the VIP. First, the teams developing new ideas at the VIP are isolated from
their normal roles. They work at the VIP exclusively for weeks on end until the project is complete. Second, there
are fifty or so specialists at the VIP that support the teams and give advice as they work through the decision process
for developing new products. Third, they pull together teams of engineers, designers, and planners from across the
company. They believe that the fresh mix of viewpoints and knowledge leads to more creative ideas. Third, they set
deadlines for various steps in the process and for the project’s completion to keep the teams moving forward.
Finally, each team assesses their ideas on rank them on a range of attributes to create “value curves.” This helps
them understand the strengths and weaknesses of each option and identify how they can differentiate Samsung with
the product they are developing.
This may seem like an extreme situation but most at Samsung see it as highly valuable. Doosik Joo, a father of three
and five-time VIP alumnus says, “People say, ‘You’ve spent all your life there, and what have you done?’” He says,
“I can say, ‘I drove down costs, created more value for the customer.’” Clearly, this level of commitment is a key
element of Samsung’s success: The company has lower manufacturing costs, higher profit margins, quicker time to
market, and, more often than not, more innovative products than its competition.
Source: Lewis, P. 2005. A perpetual crisis machine. Fortune, September 19:59-76. Ihlwan, M. 2006. Camp
Samsung. BusinessWeek, July 3: 46-48
Discussion Question 21: What are the advantages and disadvantages of an innovation
program such as the Samsung VIP Center?
1. New Venture Groups
Corporations often form new venture groups whose goal is to identify, evaluate, and
cultivate venture opportunities. These groups typically function as semi-autonomous units with
STRATEGY SPOTLIGHT 12.5 describes how Taco Bell uses an NVG to spur
entrepreneurial activity within the firm.
Discussion Question 22: What are the advantages and disadvantages of separating New
Venture Group activities from other ongoing operations of the corporation? Explain.
The SUPPLEMENT below illustrates how Cisco is using acquisitions to pull in new business
ideas and keep the firm entrepreneurial.
Extra Example: Cisco’s Buying Binge of New Ventures
For years, Cisco has looked at small technology firms as new venture groups for the computer networking titan. The
recession and the associated decline in financing for technology ventures have increased the opportunities for the
firm. Small technology firms with innovative ideas but limited financial resources are ripe for an offer from Cisco
since the entrepreneurial firms have limited options to raise the financing they need to grow. With over $25B in
cash, Cisco is on the prowl for acquisitions to provide innovations needed to grow market share in the thirty
different markets Cisco is pursuing. This quest for innovative firms led Cisco to make seven acquisitions in 2009,
five in 2010, and three in the first three months of 2011. Some of these acquisitions, such as their acquisition of Inlet
Technologies—a manufacturer of digital media processing systems, provides products Cisco can integrate with
existing products to strengthen their position in existing markets. Other acquisition targets, such as MOTO
Development Group—a consulting firm specializing in consumer industries, provide the resources needed for Cisco
to move into new product or customer segments. Cisco is just one of a number of technology leaders looking toward
acquisitions as a means for innovation and growth.
Source: Burrows, P. 2009. Cisco’s extreme ambitions. Business Week. November 30: 26-27. Copeland, M. 2008. Big
tech goes bargain hunting. Fortune. November 10: 43-46. www.cisco.com.
Discussion Question 23: What are the advantages and disadvantages of acquiring
existing companies as a way to expand corporate innovation activities?
Teaching Tip: Even organizations that have New Venture Groups often fail to convert
their efforts into profit-making successes. Ask students what is it about large
2. Business Incubators
Business incubators are designed to “hatch” new businesses. They are a type of corporate
Company-sponsored incubators provide experience and resources. The following five
functions are typically provided by corporate parents:
1. Funding
2. Physical Space
Discussion Question 24: What are the advantages and disadvantages of company
sponsored incubators as a way to support corporate entrepreneurial ventures?
B. Dispersed Approaches to Corporate Entrepreneurship
Corporate entrepreneurship that is dispersed occurs when a dedication to the principles
and practices of entrepreneurship is spread throughout the organization. Organizational members
Three related aspects of dispersed entrepreneurship include entrepreneurial cultures,
1. Entrepreneurial Culture
A culture of entrepreneurship is one in which the search for venture opportunities
Discussion Question 25: What are some examples of firms that you are familiar with that
have an entrepreneurial culture?
Discussion Question 26: What are the elements of an entrepreneurial culture? That is,
what does it take in terms of beliefs, values, incentives, rewards, and so forth for an
organization to be continually thinking about entrepreneurial opportunities?
The SUPPLEMENT below presents the example of the Virgin Group a highly innovative
company with a strong entrepreneurial culture.
Extra Example: Growing New Ventures at Virgin Group
While most large companies have to work hard to stoke the fires of entrepreneurship, they burn with ferocious
intensity at the Virgin Group. With worldwide revenues of $21 billion in 2011, the company that has created nearly
200 businesses provides clear evidence that ideas, capital, and talent can flow as freely in big, far-flung
organizations as they can among the start-ups of Silicon Valley.
The mix of businesses that Virgin has spawned is indicative of the fun-loving, eclectic culture that its chairman,
Richard Branson, has developed. Branson and his deputies have worked hard to create a culture where employees
speak up and share their ideas. There are no gleaming corporate headquarters or executive privileges, just a large
house in London where meetings are held in a small room. “Rules and regulations are not our forte,” Branson said.
“Analyzing things to death is not our kind of thing.”
There aren’t even any job descriptions at Virgin because they are thought to place too many limits on what people
can do. Instead, senior executives work shoulder to shoulder with first-line employees. Branson believes that
employees should be given top priority and he has created a friendly, nonhierarchical, familylike environment in
which people have fun and enjoy themselves. His advice to his employees reflects his personal philosophy: “Do
things that you like. If your work and your hobby are the same, you will work long hours because you are
motivated.”
The result is that Virgin’s businesses include entertainment megastores, cinemas, a fun-to-fly airline, an all-in-one
consumer banking system, a hip radio station, and a passenger train service. Smaller ventures have also been
launched by persistent employees with good ideas. “We’ve got people all over the world who are coming up with
great new ideas, and trying them doesn’t actually cost us a lot relative to the overall size of the group,” says
Branson.
Virgin’s latest ambitions are out of this world—literally. Branson teamed-up with Burt Rutan, winner of the X-Prize
competition which awarded $10 million to the first non-government-funded flight to reach an altitude of 62 miles
twice with the same vehicle. With Rutan’s help, Virgin wasted no time in forming a new spin-off: Virgin Galactic.
The enterprise has developed SpaceShipTwo,a vehicle that can carry two pilots and six passengers outside the
earth’s atmosphere and into lower space. As of June 2013, Virgin Galactic has sold 600 tickets for space travel at
$250,000 each and plans to begin commercial flights in early 2014. According to Rutan, “Space tourism will be a
multibillion-dollar industry.” It’s just that kind of vision—and risk taking—that has made the 56-year old Branson’s
Virgin Group one of the most exciting and profitable examples of corporate entrepreneurship.
Sources: Freedman, D. H. 2005. Burt Rutan, Entrepreneur of the Year. Inc. Magazine, January: 58-66; Hamel, G.
1999. Bringing Silicon Valley Inside, Harvard Business Review 77(5): 71–84; Hopkins, M. J. 2005. Richard Branson.
Inc. Magazine, April: 100-102; Kets de Vries, M. F. R. 1998. The Transformational Abilities of Virgin’s Richard
Branson and ABB’s Percy Barnevik. Organizational Dynamics 26 (3): 7–21; Port, O. 2004. SpaceShipOne’s heady
flight path. BusinessWeek Online, October 1, Gerew, G. 2013. Virgin signs up 600th space traveler.
www.bizjournals.com. June 20: np; www.businessweek.com; and www.virgin.com.
2. Resource Allotments
Corporate entrepreneurship will only be successful if firms are willing to commit the
resources necessary to both generate and implement innovative ideas. Some firms, such as 3M
Discussion Question 27: What are some other examples of firms that provide resources
to entrepreneurs within the firm? What are some innovative products that have come out
of these programs?
Discussion Question 28: Does providing time for entrepreneurial idea development work
for all firms or for certain types of firms? For what types of firms does it offer the most
potential?
3. Product Champions
In some organizations, even the best ideas have difficulty getting accepted. Therefore,
A new venture idea must pass through two critical stages or it may never get off the
ground—project definition and project impetus:
1. Project Definition A promising opportunity has to be justified in terms of whether
2. Project Impetus The strategic and economic impact of a project must be
supported by senior managers who have experience with
The role of product champions is to generate support, especially during the time after a
new project has been defined but before it gains momentum. They form a link between the
Discussion Question 29: What are some examples of companies that have a favorable
policy toward product champions?
C. Measuring the Success of Corporate Entrepreneurship Activities
This section asks, “Is corporate entrepreneurship successful?” What factors do
corporations consider when evaluating the success of CE programs?
1. Comparing Strategic and Financial CE Goals
Just over 50 percent of corporate venturing efforts reach profitability (measured by ROI)
Three questions should be used to assess the effectiveness of a corporation’s venturing
initiatives:
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?
Another way to evaluate a corporate venture is in terms of the four criteria from the
Balanced Scorecard.
Discussion Question 30: Should the same criteria that are used to evaluate corporate
performance in general also apply to corporate entrepreneurship? Why or why not?
2. Exit Champions
Many entrepreneurial initiatives never work out or turn into profitable ventures.
Corporations can avoid these costly defeats by supporting a key role in the CE process
—“exit champions.” Exit champions question the viability of venture projects and hold the line
III. REAL OPTIONS ANALYSIS: A USEFUL TOOL
This section discusses the practical implications of real options analysis (ROA) as a tool
that has been adopted by executives and consultants to support the strategic decision-making in
A. Applications of Real Options Analysis to Strategic Decisions
The concepts of options can be applied to strategic decisions to give management
flexibility. That is, it enables management to decide whether or not to invest additional funds to
grow or accelerate an activity, delay perhaps to learn more, shrink the scale of the activity, or
Teaching Tip: To illustrate the rather abstract concept of Real Options, you may ask
students why companies provide business students with internships. You may probably
give many answers that include reasons such as improved public relations, meet short-
B. Potential Pitfalls of Real Options Analysis
We address some of the potential downsides of using ROA. These include:
Agency Theory and the Back-Solver Dilemma - wherein managers may have an
Managerial Conceit: Overconfidence and the Illusion of Control - in which
managers may shift away from careful analysis and rely on their “superior
Managerial Conceit: Irrational Escalation of Commitment - since the “option to
exit” requires reversing a decision often made by incumbent managers who are
Discussion Question 31: What are the advantages and disadvantages of using a real
options approach to evaluating entrepreneurial opportunities?
In the SUPPLEMENT below we link real options analysis to the task of evaluating
promising innovations in an entrepreneurial context.
Extra Example: Using Real Options to Manage Innovation Strategies
A real options approach provides an ideal way for entrepreneurial firms to experiment by making incremental
investments. Staging investments is a useful technique for companies seeking to explore opportunities and also
avoid costly mistakes. Investments should be aimed at testing assumptions and resolving critical unknowns. Once a
company has invested in the appropriate experiments, it is usually faced with one of four options:
Double down—when winning strategies are identified, its time to move forward rapidly including making
additional investments if necessary.
Continue exploring—experiments may require further investments to reduce uncertainty and fully test
assumptions.
Adjust the game plan—experiments sometimes reveal that when one way is blocked another is open; if so,
change the approach and keep experimenting.
Shelve—when no clear path forward exists, it is best to cease investing until something changes.
Another issue that companies must manage is the number of projects it attempts to handle at once. It’s important to
experiment with a lot of ideas at first but once the unpromising ones have been identified, companies need to focus
and avoid trying to move dozens of ideas forward simultaneously. It’s also important to make decisions rapidly and
move forward quickly on the projects with the fewest uncertainties and highest potential. Thus, a real options
approach provides a useful way to manage innovation.
Source: Anthony, S. D., Eyring, M., & Gibson, L. 2006. Mapping your innovation strategy. Harvard Business
Review, 84(5): 13-23.
Discussion Question 32: Can you think of situations where a real options strategy might
not be the best approach to managing innovation? (Hint: 1) when a decision to acquire a
young firm requires a rapid response; 2) when a new technology requires a large initial
investment.)
