Chapter 13: Strategic Entrepreneurship

Chapter 13 Strategic Entrepreneurship

KNOWLEDGE OBJECTIVES 1. Define and explain the concept of strategic entrepreneurship. 2. Describe and explain the importance of entrepreneurial opportunities, innovation and entrepreneurial capabilities. 3. Discuss the importance of international entrepreneurship and describe why it is increasing. 4. Describe the two forms of internal corporate venturing: autonomous and induced strategic behaviors. 5. Discuss how cooperative strategies such as strategic alliances are used to develop innovation. 6. Explain how firms use acquisitions to increase their innovations and enrich their innovative capabilities. 7. Described the importance of venture capital and initial public offerings to entrepreneurial activity. 8. Explain how the practice of strategic entrepreneurship creates value for customers and shareholders of all types of firms, large and small, new and established. CHAPTER OUTLINE Opening Case What Makes Entrepreneurs Successful? STRATEGIC ENTREPRENEURSHIP AND INNOVATION Innovation ENTREPRENEURS AND ENTREPRENEURIAL CAPABILITIES INTERNATIONAL ENTREPRENEURSHIP Strategic Focus Developing the Best New Products on the Market NEW PRODUCT DEVELOPMENT AND INTERNAL CORPORATE VENTURES Incremental and Radical Innovation Autonomous Strategic Behavior Induced Strategic Behavior IMPLEMENTING NEW PRODUCT DEVELOPMENT AND INTERNAL VENTURES Cross-Functional Product Development Teams Facilitating Integration and Innovation Creating Value from Innovation COOPERATIVE STRATEGIES FOR ENTREPRENEURSHIP AND INNOVATION Strategic Focus Seeking Growth through Internal Development or Acquisitions Acquisitions to Buy Innovation Capital for Entrepreneurial Ventures Strategic Focus Sources of Capital for Entrepreneurial Ventures CREATING VALUE THROUGH STRATEGIC ENTREPRENEURSHIP SUMMARY

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REVIEW QUESTIONS EXPERIENTIAL EXERCISE NOTES LECTURE NOTES

OPENING CASE What Makes Entrepreneurs Successful? There are many types of entrepreneurs and no one formula for success. Marion McCaw Garrison graduated from the University of Washington in 1939. At 22 years of age, she bought 40 acres of land and became one of the first female real estate developers. She later added radio and television businesses to her managerial experience, and finally entered the cable television and wireless communications businesses. The company went public in 1987 and in 1994, McCaw Cellular Communications was sold to AT&T for more than $11 billion. Marion was successful because of her strong business knowledge and determination. Anatoly Karachinsky took over a computer consulting firm in Russia. In 1994 he met Michael Dell and became the exclusive distributor of Dell computers in Russia. Through impressive management and outside investment, the company continues to grow and now controls much of the IT market in Russia. In 2001, the firm earned $2 million in pretax income on total revenues of $215 million. Anatoly was successful because he had a good idea and implemented it without help from the Russian government or the black market. In 1995, Jonathan Coon started a simple business (mail order contact lenses) but was a visionary. By 2001, it had become the largest direct-toconsumer contact lens business in the world. It stocks 9 million lenses, selling over 100,000 per day. Before he started the business, he developed an effective business plan that has produced a strong cash flow. He also has an effective distribution system and built-in repeat business because the product is disposable. The name of the company is also its phone number, 1-800 CONTACTS. He empowers his employees to do whatever is necessary to satisfy customers, allows them to participate in developing company policies, and provides stock options to all employees.

OPENING CASE Innovation, Competition, and Competitive Success in the Global Automobile Industry As for many other industries, innovation is important to the success of automobile manufacturers. Innovation can include those related to product development, as well as other features of the work of the organization (e.g., the introduction of the M-form division at GM and its adoption at other carmakers).

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The merger of Daimler-Benz and Chrysler Corporation was an innovative structural response designed to create economies of scope for the combined firm and to integrate the R&D functions of the two firms. Such innovation is considered critical especially to the future success of the DaimlerChrysler minivan, which has experienced some market-share decline in recent years. In the past, GMs Cadillac was the product line through which product innovations were introduced to the market. For example, GM adapted thermal-imaging technology from the military to introduce Night Vision as an option for DeVille DTS buyers (who tend to be older and need more light to see well). Other night vision innovations are likely to be introduced in the future. Other innovations in the automobile industry include: innovative trucks that are car-truck hybrids Fords THINK projects that use clean-battery and fuel-cell propulsion technology the reintroduction of the Packard as an all-aluminum muscle car Given the innovations about to be introduced to the market by foreign competitors, American firms realize that they cannot afford to be careless in their development and introduction of new innovations of their own. This profile highlights the importance of innovation in large firms (in this case, the automobile industry). However, it should be noted that in many (especially global) industries, innovation is related to strategic competitiveness and ability to earn above-average returns characteristics of the global economy make it increasingly easy to commoditize products prevailing conditions include overcapacity, multiple competitors, intense competitive rivalries, rapidly changing technologies and market conditions, and the ability to standardize production methods in manufacturing firms and delivery mechanisms in service businesses innovations are critical to companies efforts to differentiate their good or service from competitors in ways that create additional or new value for customers

Define and explain the concept of strategic entrepreneurship.

Entrepreneurship is the economic engine driving many nations economies in the global competitive landscape. Entrepreneurship and innovation have become important for young and old, large and small organizations in all types of industries. Research

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conducted by the Center for Entrepreneurial Leadership at the Kauffman Foundation has shown that in recent years almost 100 percent of the new jobs in the U. S. have been created by entrepreneurial firms of less than two years of age. Strategic entrepreneurship is taking entrepreneurial actions using a strategic perspective. More specifically, it involves engaging in simultaneous opportunity seeking and competitive advantage seeking behaviors to design and implement entrepreneurial strategies to create wealth. Because of todays uncertain environment (i.e., a global marketplace with significant complexity), firms cannot easily predict the future. As a result, they must develop strategic flexibility to have a range of strategic alternatives that they can implement as needed. Creating tomorrows business requires a constant search for emerging opportunities. To describe how firms produce and manage innovation, several topics are examined in this chapter. Entrepreneurship and innovation in a strategic context International entrepreneurship Innovation through either autonomous or induced strategic behavior Actions firms take to implement the innovations resulting from those two types of strategic behavior Innovation through internal development Strategic alliances and acquisitions Entrepreneurship in start-up ventures and smaller firms Review Question 1: What is strategic entrepreneurship? What is its importance for firms competing in the global economy? Describe and explain the importance of entrepreneurial opportunities, innovation and entrepreneurial capabilities.

INNOVATION, ENTREPRENEURSHIP, CORPORATE ENTREPRENEURSHIP, AND ENTREPRENEURS According to Schumpeter, entrepreneurship is a process of creative destruction, through which existing products or methods of production are destroyed and replaced with new ones. Thus, entrepreneurship is concerned with the discovery and exploitation of profitable opportunities.

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Entrepreneurial opportunities represent conditions in which new products or services can satisfy a need in the market. The essence of entrepreneurship is to identify and exploit these opportunities. After identifying the opportunities, entrepreneurs take actions to exploit them and establish a competitive advantage. To do that, actions must be valuable, rare, difficult to imitate, and non-substitutable. Peter Drucker argues that innovation is a function of entrepreneurship, as well as being the means that an entrepreneur uses to create new wealth-producing resources or enhance the potential of existing resources for creating wealth. Entrepreneurship and innovation are important for large and small firms as well as startups as they compete in the 21st centurys competitive landscape. These are central to creativity, economic growth, productivity, and job creation. Innovation Innovation has an impact on firm outcomes. Innovation is a key source of competitive success for firms competing in the global economy. Innovation is intended to enhance a firms strategic competitiveness and financial performance. Research shows that firms competing in global industries that invest more in innovation also achieve the highest returns. Schumpeter suggested that firms generally engage in three types of innovative activity: invention, the act of creating or developing a new product (good or service) or process idea innovation, the process of creating a commercializable product from invention imitation, the adoption of innovation by a population of similar firms, which typically results in standardization of the product or process idea Innovations produced in large established firms are often referred to as corporate entrepreneurship. Corporate entrepreneurship is a process whereby an individual or a group in an existing organization creates a new venture or develops an innovation. To facilitate corporate entrepreneurship, it is important to determine how to harness the ingenuity of employees and reward them for it while retaining some of the rewards of the entrepreneurial efforts for the shareholders benefit.

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STRATEGIC FOCUS Surprise, Surprise, Surprise! What Might Be Tomorrows Innovative Products, and What Will Be the Source of Their Development As stated in the text, innovation is defined as the process of creating a commercial product or process from an invention. However, the firm can create value from innovation only when a firm develops and sells a product that satisfies customers current or unmet needs. Innovation has created value in ways that can be categorized by functionality. These include the following (each of which includes the commercialization of an invention): in the home (e.g., vacuum cleaners, duct tape, Tupperware) in communication (e.g., radio, television, the Internet) at work (e.g., the photocopier, fax, and microprocessors) The future is likely to yield other innovations, including the following: Environmentally friendly products (e.g., renewable energy and wired appliances) Investment services (e.g., videoconferencing for stockholder meetings)

R&D activities are the source of innovation, a fact that is readily accepted by Japanese corporations. R&D spending at Samsung tripled in 2000 and Japanese firms garnered 32,119 U.S. patents in 1998, an increase of 32 percent over 1997. Firms in the West would be wise not to underestimate the effect this commitment to innovation will have for Japanese firms competing globally. Evidence shows firms throughout the world are committed to innovation.

Entrepreneurs and Entrepreneurial Capabilities Entrepreneurs are individuals, acting independently or as part of an organization, who create a new venture or develop an innovation and take risks entering them into the marketplace. Top-level managers should try to establish an entrepreneurial culture that inspires individuals and groups to engage in corporate entrepreneurship. For example: Steve Jobs of Apple Computer believes one of his key responsibilities is to help Apple become more entrepreneurial and more like a start-up. Top-level executives at 3M have emphasized innovation through entrepreneurship for many years.

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Developing innovations and achieving success in the marketplace requires effective human capital. In particular, firms must have strong intellectual capital in its R&D organization. However, firms must have strong human capital throughout its workforce if employees are to be innovative. Review Question 2: What are entrepreneurial opportunities, innovation and entrepreneurial capabilities and what is their importance? Discuss the importance of international entrepreneurship and describe why it is increasing.

INTERNATIONAL ENTREPRENEURSHIP Entrepreneurship is a top priority in many countries of the world (e.g., Finland, German, Israel, Ireland, and France). Northern Ireland, for example, is emphasizing R&D and innovation as critical components of entrepreneurship and essential to a healthy economic future. A recent study of 29 countries found that the percentage of adults involved in entrepreneurial activity ranged from a high of over 20 percent in Mexico to a low of slightly over 5 percent in Belgium. The U.S. had a rate of about 13 percent. Importantly, this study also found a strong positive relationship between the rate of entrepreneurial activity and economic development in the country. Research indicates that there is a direct relationship between entrepreneurship and collectivism: when collectivism is emphasized, entrepreneurship declines. However, extremely high levels of individualism also can have a negative impact on entrepreneurship. Thus, a balance is needed between individualism and collectivism (or the spirit of cooperation and group ownership of innovation). With increasing globalization, an increasing number of new ventures have been born global (i.e., started as an international concern). New ventures that enter international markets increase their learning of new technological knowledge and thereby enhance their performance. STRATEGIC FOCUS Developing the Best New Products on the Market The best new products for 2001 are quite varied, ranging from the high tech (the Apple PowerBook G4 laptop) to food products (a new low-fat cereal by General Mills). A new plastic paycheck allows people to have their pay deposited into Visa accounts and then use their Visa Card to pay for goods in a manner similar to a debit card. Hitachi has developed a camcorder on which the owner can edit home movies (DZ-MV100A).

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Equator developed the Round Refrigerator that features pull-out shelves that operate similar to a lazy susan. Listerine introduced stamp-sized strips to freshen your breath. While the Samsung 1300combining wireless phone functions with those of a palm organizerwas selected as a best product, Nokia brought to the market one of the cutest wireless phones. The Nokia 8270 offers code division multiple access (CDMA) technology. Analysts believe the new fashion-sensitive phone will compete well with Samsung and Motorola products. The Nokia 8270 supports a wireless Internet browser, two-way text messaging, and serves as an alarm clock and calendar. Intel invests $4 billion annually in R&D and does not let up during recessions. In fact, the feeling at Intel is that you can gain ground on competitors during recessions. Intel is now designing a new way to manufacture chips because they could not build them much smaller or faster using the existing manufacturing technology. So, a process innovation will facilitate further product innovation. When Robert Lutz, formerly of Chrysler, was hired as the new product czar at GM, he changed a system that he said was producing a lot of bunts, singles, and walks but no home runs. Lutz is changing the culture to promote inspiration and the development of new ideas. The results are already evident at the automaker.

Review Question 3: Why is international entrepreneurship important and why is it increasing across the globe? Describe the two forms of internal corporate venturing: autonomous and induced strategic behaviors.

NEW PRODUCT DEVELOPMENT AND INTERNAL CORPORATE VENTURES Most innovation is developed through Research and Development (R&D). In fact, R&D may be the most critical factor in gaining and sustaining a competitive advantage in some industries (e.g., pharmaceuticals). Incremental and Radical Innovation Most innovations are incremental. That is, they build on existing knowledge bases and provide small improvements in the current product lines. Alternatively, radical innovations usually provide significant technological breakthroughs and create new knowledge. Radical innovations are rare because of the difficulty and risk involved in developing them. Internal corporate venturing represents the set of activities used to create inventions and innovations within a single organization. The internal corporate venturing process is illustrated in Figure 13-1.

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FIGURE 13-1 Model of Internal Corporate Venturing This model illustrates the two approaches to internal corporate venturing:

Autonomous strategic behavior is a bottom-up process which enables product champions to pursue new product ideas and sponsor them through a political process until they achieve commercial success. Induced strategic behavior is a top-down process where product and process ideas are developed within the context of a firms existing strategy, structure, and strategic intent.

Whichever process is followed takes place within and is affected by the structural and strategic context of the organization. Each of these topics will be discussed in more detail in the sections that follow.

Autonomous Strategic Behavior One way that product and process innovation can be achieved in organizations is through autonomous strategic behavior, a bottom-up process in which new product champions pursue new product ideasoften through a political processwhere they develop and coordinate the commercialization of a new good or service until it reaches marketplace success. A product champion is a member of an organization who has an entrepreneurial vision (or mental image) of a new good or service and seeks to create support for its commercialization. Product champions play a critical role in advancing innovations within the firm. Autonomous strategic behavior is based on a firms knowledge and resources that provide the sources of a firms innovation, so a firms capabilities and competencies are the basis for new products and processes. As an example of autonomous strategic behavior, GEs Industrial Systems division developed a program that uses artificial intelligence to assign field engineers to customer sites, handling thousands of constraints in the process. The divisions customer relationship manager, the champion for this product, concluded that the program facilitates operations, as well as providing a new product that boosts sales for the firm.

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Induced Strategic Behavior The second approach to creating internal corporate venturing is induced strategic behavior, a top-down process where the current strategy and structure foster product innovations that are associated closely with the firms current strategy and structure. In other words, strategy is filtered through the firms existing structural hierarchy, a process that may result in inertia in the firms strategic context.

STRATEGIC FOCUS Product Innovations and Induced Strategic Behaviors: Personal Computers, Video Games, and Other Delights Despite previous failed efforts, Sony Corporation announced in 1996 that it would introduce yet another PC line; at this time, though, Sony is only one of four major PC brands left standing in the brutal U.S. market. The firm wanted a Sony-like PC, and that is what its development staff delivered--a sleek look and design, though somewhat limited in technical performance. Now Sony is implementing its strategy through the PlayStation2, which serves as a Trojan horse of sorts that enters the house as a video game player and then serves as a point of entry to the Internet and for playing movies and music (thus replacing the PC). The PlayStation2 has been a smash hit in the Japanese market, becoming a viable entertainment platform for the home. Sony is the only firm to offer all three devices (the PC, television, and video-game machine) around which homes could be wired for digital devices, and its global penetration to date is impressive. Other firms are following a similar innovation strategy. For example, Nissan is planning to launch a sport-utility vehicle, a new minivan, a new Zcar, and other products by the year 2003. Nissan executives also propose the changeover of six of their other car models to enhance the strategic strength of each.

IMPLEMENTING VENTURES

NEW

PRODUCT

DEVELOPMENT

AND

INTERNAL

As indicated in Chapter 12, employing an entrepreneurial mindset entails not only developing new products and markets but also an emphasis on execution.

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Innovation is a necessary but insufficient condition to competitive success. Having processes and structures in place through which the firm can successfully implement the outcomes of internal corporate ventures is as vital as are the innovations themselves. Increasingly, product development teams are being used as a means of integrating the activities associated with different organizational functions. Cross-Functional Product Development Teams Cross-functional teams facilitate efforts to integrate activities associated with different organizational functions, such as design, manufacturing, and marketing. In addition, new product development processes can be completed more quickly and the products more easily commercialized when cross-functional teams work effectively. Horizontal organization refers to changes in organizational processes where managing across functional units becomes more critical than managing up and down functional hierarchies. Cross-functional teams group product development stages into parallel or overlapping processes, which allows the firm to tailor its product development efforts to its unique core competencies and to the needs of the market. There are two primary barriers that may prevent the successful use of cross-functional teams as a means of integrating organizational functions: (1) independent frames of reference of team members and (2) organizational politics. Research suggests that functional departments vary along four dimensions: time orientation, interpersonal orientation, goal orientation, and formality of structure. Thus, individuals from different functional departments having different orientations on these dimensions can be expected to perceive product development activities in different ways. Political activity may center on allocating resources to different functions. Interunit conflict may result from aggressive competition for resources among those representing different organizational functions. Facilitating Integration and Innovation Cross-functional integration can be achieved by the following four methods: shared values or corporate culture leadership goals and budgets effective communication systems

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Shared values: are expressed through the firms corporate culture (as discussed in Chapter 12) should be clearly linked with the firms strategic intent and strategic mission promote unity and internal innovation Leadership: emphasizes the importance to the firm of the value-creating potential of innovation value-creating potential of innovation encourages the integration of functional activities Effective communication systems lead to the following outcomes: facilitating cross-functional integration sharing knowledge among team members creating synergy and gaining commitment to an innovation throughout the organization supporting the development and commercialization of new products Creating Value from Innovation The model in Figure 13.2 shows how value can be created for the firm from internal processes designed to develop and commercialize new goods and services. An entrepreneurial mindset must be developed so that managers and employees are seeking to identify and exploit opportunities for new goods and services and new markets. Crossfunctional teams are important to promote integrated new product design ideas and commitment to their implementation thereafter. Effective leadership and shared values promote integration and vision for innovation and commitment to it. The end result for the firm is the creation of value for the customers and shareholders through development and commercialization of new products.

FIGURE 13-2 Appropriating Value from Internal Firm Innovation As indicated in this model, attempts at successful cross-functional integration or establishing cross-functional design teams faces four barriers related to differences attributable to functional specialization: time orientation functional language and interpersonal orientation goal orientation structural formality These barriers can be overcome by: establishing shared values leadership that provides a new product-, innovation-related vision

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budget allocations to foster an integrated design effective communication systems

When cross-functional integration is successful, the firm improves: time-to-market product quality creation of customer value is able to appropriate value from innovation. As the model in Figure 13.2 suggests, internal corporate ventures must be effectively managed to facilitate cross-functional integration so a firm will be able to appropriate maximum value from its product design and commercialization efforts. Review Question 4: What is autonomous strategic behavior? What is induced strategic behavior? Review Question 5: How do cross-functional teams, shared values and entrepreneurial leadership help firms be more innovative? Discuss how cooperative strategies such as strategic alliances are used to develop innovation. STRATEGIES FOR ENTREPRENEURSHIP AND

COOPERATIVE INNOVATION

Our previous discussion was centered on how firms can achieve strategic competitiveness and earn above-average returns through internal innovation processes. However, few firms may possess all of the knowledge necessary to compete successfully in all of their product areas over the long term. In addition, many firms may not possess the resources, capabilities, and core competencies that are required to effectively and efficiently pursue internal innovation. Entrepreneurial new venture firms may need investment capital as well as distribution capabilities to implement a new product idea and introduce it to the market. Alternatively, more established companies may need new technological knowledge and seek access to it through alliances with newer entrepreneurial firms. For example, alliances between large pharmaceutical firms and biotechnology companies are increasingly formed for these purposes. Because of the importance of alliances, particularly in the development of new technology and in commercializing innovations, firms are beginning to build networks of
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alliances that represent a form of social capital to them. This social capital in the form of relationships with other firms helps them to obtain the knowledge and other resources necessary to develop innovations. Knowledge from these alliances helps firms develop new capabilities. Some firms now even allow external firms to participate in their internal new product development processes However, alliances formed for the purpose of innovation are not without risks. An important risk is that a partner will appropriate a firms technology or knowledge and use it to enhance its own competitive abilities. To prevent or at least minimize this risk, firms, particularly new ventures, need to select their partner carefully. Research has shown that firms can become involved in too many alliances that can harm rather than facilitate their innovation capabilities. Thus, effectively managing the cooperative relationships to produce innovation is critical.

STRATEGIC FOCUS Seeking Growth Through Internal Development of Acquisitions The capital markets value growth and therefore, firms seek growth in multiple ways. One important means of growth is through the creation and commercialization of new products. For example, innovation has been a primary means of growth for 3M; it has developed a reputation for being an innovative company. While acquisitions can be expensive, R&D is costly as well. For example, Campbell Soup announced in 2002 that the company was cutting dividends to shareholders in order to increase its investment in R&D and develop new products and improve the quality of Campbells existing product lines. Analysts expressed concern with the time required for this strategy to work. Acquisitions can provide access to new products more quickly than additionally investments in R&D. For example, Kellogg dramatically changed its product mix with an acquisition of Keebler Foods for $4.4 billion. This acquisition provided Kellogg with faster growth products along with an effective distribution system. Merck traditionally has had a policy of growth through internally developed new products. However, in 2001-2002, it experienced increasing pressure to acquire a firm with several new drugs (e.g., expiration of patents on several key drug products, new products have not done as well in the market as hoped). However, Merck CEO, Raymond Gilmartin, considers the firms core competence to be the capability to turn cutting-edge science into medical breakthroughs. Mercks future then rests on its continued ability to introduce valuable pharmaceutical innovations without making acquisitions.

Review Question 6: How do firms use strategic alliances to help them produce innovation?

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Explain how firms use acquisitions to increase their innovations and enrich their innovative capabilities.

ACQUISITIONS TO BUY INNOVATION In addition to developing the ability to produce and manage innovation through joint ventures and strategic alliances, these abilities can also be acquired outright through acquisition or investment. A key risk of acquisitions is that a firm may substitute an ability to buy innovations for an ability to produce innovations internally. In support of this contention, research shows that firms engaging in acquisitions introduce fewer new products into the market. Review Question 7: How can a firm use acquisitions to increase the number of innovations it produces and improve its capability to produce innovations? Described the importance of venture capital and initial public offerings to entrepreneurial activity.

Capital for Entrepreneurial Ventures As an alternative to the outright acquisition of innovation through acquiring other firms, organizations may choose to invest in firms or businesses (that either may or may not be in the firms own portfolio of businesses) with high growth potential. Venture capital is being used to earn high rates of return by supporting the acquisition of innovations, and some firms establish their own venture capital divisions to provide such support. The amount of venture capital invested in new ventures reached a high of $46.1 billion in 1999. Research has shown that venture capitalists may earn large returns or experience significant losses. For example, one study found that 34 percent of the Venture capitalists experienced a loss, while 23 percent gained a rate of return on their investments of 50 percent or greater. Venture capitalists place weight on the competence of the entrepreneur or the human capital in the firm. However, they also place weight on the expected scope of competitive rivalry the firm is likely to experience and the degree of instability in the market addressed.

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Increasingly, venture capital is being used to support the acquisition of innovations. To provide such support, some firms establish their own venture-capital divisions. Some relatively new ventures are able to obtain capital through initial public offerings (IPOs). Firms that offer new stock in this way must have high potential in order to sell their stock and obtain adequate capital to finance the growth and development of the firm. When investing venture capital, the strategic benefits to a corporation include: the ability to invest early and observe what happens to the new venture movement toward subsequent acquisitions, technology licensing, product marketing rights, and possibly the development of international opportunities gaining a window on future technological development Potential returns may be limited by the risk-reduction effects of venture funds syndication and the participation of other firms.

STRATEGIC FOCUS Sources of Capital for Entrepreneurial Ventures Biotechnology firms received strong support early in their development from the capital market. Thus, several of them were able to raise significant capital through IPOs. However, when the stock market entered a downturn in late 2000 and 2001, biotech firms needing capital had to turn to venture capitalists. And the investors obtained good deals to provide needed capital to these firms. These firms received $10-11 billion from IPOs in 2000 but only about $3 billion in 2001. Alternatively, biotech firms received about $5 billion from venture capitalists in 1998-99 but about $17 billion in 2000-01. However, venture capitalists were hurting in 2001 as well. For example, Venture capitalists invested $98 billion in U.S. new ventures in 2000. Such amounts were prompted by the approximately 100,000 percent return earned by venture capitalists that invested early in eBay. Unfortunately the rapid decline of the dot.com firms in which substantial venture capital was invested had many venture capitalists in a crisis mode in 2001-02. Thus, new venture firms experienced difficulty in obtaining the necessary capital to survive and grow. A McKinsey study showed that venture capitalists earned an average return of 13.4 percent in the 1990s compared to 12.1 percent earned by public equity firms. The difference is not large for the significant difference in risks taken by the two on their investments. Some venture capital funds (e.g., the Markle Foundation) invest to create social change, but most venture capitalists invest to earn a good return. However, events beyond recessions and stock market downturns (e.g., September 11th attacks) can harm the venture capital markets.

STRATEGIC FOCUS

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Innovation as a Key Source of Value Creation Innovation combined with value creation, yields value innovation. Value innovation refers to firms seeking to commercialize each of its inventions in such a way that the performance of all new goods/services exceed customer expectations and create new markets though the use of unique characteristics or attributes of those products or services. In other words, this is about offering radically different or greater value for customers, rather than just incremental improvements. Numerous firms have achieved value innovation. SolidWorks Corporation created SolidWorks 2000, a unique computeraided-design solution for various design problems. Callaway Golf Companys Big Bertha golf clubs offer a fundamentally new and superior value to golfers through large head clubs that make playing golf easier and more enjoyable. Other value innovation firms include Wal-Mart, CNN, Southwest Airlines, and IKEA.

Review Question 8: What is the importance of venture capital and initial public offerings to entrepreneurial activity? Explain how the practice of strategic entrepreneurship creates value for customers and shareholders of all types of firms, large and small, new and established.

ENTREPRENEURSHIP IN SMALL BUSINESSES AND ENTREPRENEURIAL VENTURES Newer entrepreneurial firms often are more effective than larger firms in identifying opportunities. Some believe that these firms tend to be more innovative as well because of their flexibility and willingness to take risks. Alternatively, larger and well-established firms often have more resources and capabilities to exploit opportunities that are identified. With resources (human and social capital), taking advantage of opportunities in domestic and international markets and using the resources and knowledge gained in these markets to be innovative allows firms to achieve competitive advantage. In so doing, they create value for their customers and shareholders.

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Research shows that because of its economic importance and individual motives, entrepreneurial activity is increasing across the globe. Also, more women are becoming entrepreneurs because of the economic opportunity it provides and the individual independence it affords. In future years, entrepreneurial activity may increase the wealth of less affluent countries and continue to contribute to the economic development of the more affluent countries. Regardless, the companies that practice strategic entrepreneurship are likely to be the winners in the twenty-first century. Review Question 9: How does strategic entrepreneurship create value for customers and shareholders and contribute to economic development?

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