Entrepreneurship Theories

   A corporate spin-off is a decision by the managers of an organization, to form a new independent organization for a unit of the company. The unit may be physically moved as a result of a spin-off or it could stay in the same building, but operates under a different corporate entity.  The owners of the parent firm typically receive shares in the spin-off company as compensation for allowing the unit to leave.  This is typical in cases where the parent firm doesn't have the resources to go after all of its innovations. Sometimes spin-offs increase the value of their parent firms by increasing strategic alignment among the remaining businesses. Other times, a spin-off can lower the value of the parent by taking away key talent and perhaps even competitive advantage. The real effect of the spin-off may not be known for some time. For public companies, their spin-offs get new tickers and trade independently form the parent company's stock allowing the market to decide ...

What is a Born Open Startup? A startup that is born open is one that rejects the notion of proprietary knowledge appropriation (e.g,. obtaining patents ). In fact, software patents are probably the born open crowd's worst abomination.   Instead, a born open startup views itself as a part of a ecosystem of firms that work cooperatively and competitively. They typically are autonomous but have some interconnected goals. Open source startups participate in the development of a community of firms with a shared governing policy to prevent the appropriation of the technology. According to Mekki MacAulay, " Open strategy involves the collective production of a shared good in an open fashion such that the resulting product is available to all, including competitors. In the case of open entrepreneurship, 'born-open' startups are entrepreneurial ventures whose business models are designed specifically based around a collective good. Such business models can be effectiv...

Architectural innovation focuses on changes in product architecture and their advantages/disadvantages for incumbents and new entrants (Henderson and Clark, 1990), where many of those new entrants are going to be entrepreneurs and their startups. The bottom line of the theory for entrepreneurs is that "architectural innovation" is a promising avenue for new entrants to go after because it is difficult for incumbent to pursue such innovations. Architectural innovation is usually competence-destroying for incumbents to follow. By contrast, other types of innovations benefit incumbents, such as incremental innovations (improving components), modular innovations (swapping components) and even radical innovations (developing new capabilities in areas without legacy products). Theory basics The theory starts with the idea that a product or service is made up of components that fit together according to a type of design called "product architecture", which is either modula...

Competence destroying innovations are expected to be brought to market more successfully by new entrants than competence enhancing innovations (Tushman & Anderson, 1986). Competence = Abilities + Resources An incumbent firm's competence is destroyed when a technological innovation obsolesces the abilities and or resources that previously composed the competences of the firm. For instance, Blockbuster's retail competence was undermined by Netflix's online model. The theory goes that incumbents are reluctant to adopt competence destroying innovations because they prefer to preserve and enhance their existing competences. Besides, developing new competences often means shedding the old and that can involved painful layoffs or divestitures. These difficult organizational changes and the coalitions that form within organizations to try to stop them, create a friction that impairs adoption. Instead, the new entrant benefits from adopting competence-destroying innovations beca...

Do entrepreneurs exhibit dynamic capabilities?  At the core of the theory of dynamic capabilities is the assumption that an organization's current resources and capabilities, which may be optimally suited to the current environmental conditions, will not likely be relevant under future conditions. Recognizing that changes in technologies, policies, and tastes make for a continuously evolving landscape of needs and wants, an organization needs to be able to respond. Organizations need to be able to transform their capabilities over time as needed to seize new opportunities. They also need to be continually sensing new opportunities. According to Teece (2007): "the competitive advantage of firms stems from dynamic capabilities rooted in high performance routines operating inside the firm, embedded in the firm’s processes, and conditioned by its history" Responding to change How do they respond effectively to changes on the order of converging industries and intern...

Information asymmetry refers to a conditions whereby two parties in a market or organizational relationship have access to different information about the exchange.  It can be seen as an alternative to the classical assumption of "perfect information" in economics. Information asymmetries have been acknowledged by regulators who have made laws forbidding insider trading. Insiders have special access to the real financial picture of a company and have an unfair advantage when buying and selling company stock (Aboody, 2000). Company executives, like CEOs also have fiduciary responsibilities toward their investors which require them to be truthful and forthcoming. Information asymmetry is also a potential source of problems in entrepreneurship. For example, an entrepreneur knows much more about the real potential of their ventures because they have inside access to knowledge about their customers and the issues with production. The investors, on the other hand, have less informa...

Most new ventures are founded by former employees of organizations. Employees make discoveries while working for organizations and decide to exploit them on their own, especially when parent firms do not see the value in their discoveries, or choose not to exploit them due to a lack of fit with the firm’s strategy. When employees leave to start new ventures, we call their ventures employee spinouts .  Ambidextrous behaviors have been observed in entrepreneurs. Entrepreneurs display ambidextrous through boundary-spanning relationships, by avoiding excess exploitation and keeping time aside for exploration, by using platforms for discussing issues related to exploration, and by shifting focus from exploration to exploitation and vice versa as the current situation requires (Volery et al., 2013). The entrepreneurial process is often conceptualized as stage-based. For example, Kazanjian and Drazin (1990) suggest four stages: conception and development, commercialization, growth, ...

Niccolo Machiavelli  (born 1479) in Italy is an infamous strategist who wrote extensive letters teaching cunning strategies to "princes" that ruled over fiefdoms throughout feudal Europe at the time. 16th century Europe was very divided compared to today, especially in and around Italy, which was composed of a large number of small autonomous and semi-autonomous territories (fiefdoms and kingdoms). Although Machiavelli is often considered as a figure in the history of political science, fiefdoms were ruled by what Baumol (1996) describes as entrepreneurs of their time. Princes would take territory, or castles, rather than fight over money.    Machiavelli's letters can be thought of as elaborating entrepreneurial strategies to get ahead in feudal times, but which are largely inappropriate in the current business context.. Many regard Machiavelli's strategies as unethical, yet his famous book "The Prince" continues to be cited and read within the busines...

Should entrepreneurs strive to be first? This is an important question that is relevant to myriads of decisions that entrepreneurs make involving commitments of resources and attention. For instance, given the option to implement two ideas, one with early entry potential and the other with late entry potential, which should an entrepreneur run with? According to Kerin et al. (1992), "studies purport to demonstrate the presence of a systematic direct relationship between order of entry for products, brands, or businesses and market share." First mover advantage theory posits that new entrants that are earliest to a new market niche get several advantages, such a brand awareness and a reputation for innovativeness. Followers can built great brands too, though at a greater cost. Another first movers advantage is the ability to tie up factor markets by engaging in long term contracts with key suppliers, which makes it harder for followers to acquire the necessary complementary as...

A stakeholder approach to entrepreneurship has roots in a debate that had occurred between professors Ron Mitchell and S. Venkataraman in 2002, over the connections between stakeholder theory (Freeman, 1984) and entrepreneurship.    Stakeholder theory had largely been born out of studies of large corporations managing their stakeholders to improve incumbent firm performance, and had not been fully applied to the entrepreneurship area to explain entrepreneurial behaviours, processes, or outcomes.   Entrepreneurship and strategy research tends to be about how new wealth is created, whereas stakeholder theory is more about how that wealth should be distributed. For some, the value creation and distribution issues are separate problems, complementary perhaps, but requiring different logics. A stakeholder theory of entrepreneurship seeks to integrate the wealth creation and redistribution problem. In particular, developed economies feature some degree of competition among incu...

Contingency theory proposes that an organization's success is determined by how well its internal resources, structure, and strategies align with the external environment in which it operates. This external environment includes factors such as political, economic, social, and technological conditions. The concept of fit is central to contingency theory, as it refers to the degree to which the organization's characteristics match those of the environment in which it operates. A good fit between the organization and its environment can lead to greater success, while a poor fit can lead to inefficiencies and even failure. The understanding that there is no one-size-fits-all strategy for organizational design and administration is a major component of contingency theory. Depending on the particular environmental conditions in which they function, various organizations may require various structures, resources, and methods. For instance, a company operating in a highly regulated se...

What is the disruptive innovation theory of entrepreneurship? Disruptive innovation theory of was developed by Harvard Business School professor Clayton Christensen in his famous book entitled The Innovator’s Dilemma (2003) . Christensen’s core argument is that new entrants succeed when they pursue disruptive innovation whereas incumbents tend to pursue sustaining innovations. Disruptive innovations are technologies, products and business models that are lower performing than incumbent offerings along traditional dimensions of performance, but compensate with increased simplify, convenience, customizability, or affordability. For example, the Nintendo Wii disrupted the Xbox and Sony Playstation by offering lower quality graphics in exchange for the simplicity in the intuitive movements offered by gyroscopic technology added to the controllers. This allowed younger children, game novices, and older gamers to be able to learn to play with a minimal learning curve. Sustaining inn...

What is the strategic disagreements theory of entrepreneurship? Steven Klepper (2007) was an American economist at Carnegie Mellon University. He introduced the used the concept of strategic disagreements to explain a particular type of entrepreneurship commonly referred to as spinout (or employee spinoff) entrepreneurship. Klepper credited spinouts with the creation of clusters like Silicon Valley and Detroit. A spinout occurs when an employee of a firm leaves to start a new business. Most spinout entrepreneurs create ventures that compete indirectly with their employers by pursuing new strategies or going after new markets with differentiated products. However, the seeds of spinout ventures often originate in parent firms. For instance, many entrepreneurs report that they are exploiting ideas that were generated inside of the organizations of their previous employers (Bhide, 1994). Strategic disagreements refer to disagreements between employees and managers regarding the pro...

The underlying assumptions of the upper echelons theory are that top managers' decision-making processes determine competitive strategies, and that such strategies affect firm performance (Hambrick and Mason, 1984).    Much of the research in Upper Echelon Theory has sought to demonstrate that decision-making processes are affected by the characteristics of individuals in top management positions as well as the composition of teams and the team dynamics. Competitive strategies may include the choice of business strategy, such as low cost, differentiation, and focus strategies. They may also affect corporate strategy such as vertical and horizontal integration, as well as diversification. Business and corporate strategies are well-known to affect the financial performance of firms and new ventures. When applied to entrepreneurial teams, characteristics that have been examined include age, formal education, length of job tenure, and functional experience. Heterogeneity, such ...

The knowledge spillover theory suggests that productive innovation comes from both incumbents (established firms) and new entrants (entrepreneurs and their organizations) (Acs et al., 2009; Audretsch and Lehmann, 2005). Knowledge is inherently leaky, and moves through networks and via stakeholder mobility. This is probably a good assumption given that many organizations find it very difficult to keep secrets. Whistleblowers, for example, demonstrate the limits secrecy when they leak information that is damning to their employers. Knowledge spillovers are an important driver of economic growth and development because they enable entrepreneurs to identify and exploit new opportunities. In the context of entrepreneurship, spillovers refer to the diffusion of knowledge and ideas from one organization or individual to another. This can happen in a variety of ways, including through informal networks, collaborations, and formal knowledge-sharing mechanisms. Entrepreneurship is fundament...

Stewardship theory was put forward by Lex Donaldson and James Davis in the late 1980s as an alternative to agency theory, which they viewed as having negative assumptions about managers. Agency theory views agents (managers and entrepreneurs) as self-interested and opportunistic and views the relationship between principals (investors) and agents as necessarily conflicting. Agency theory is the logic behind providing managers and other employees with stock-based compensation to align the interests of the employees with those of the shareholders by making the employees into shareholders. In contrast to agency theory, stewardship theory posits that managers and entrepreneurs are motivated to act in the interests of their organizations and principals. The core idea is that the rewards from pro-social behavior have greater utility than individualistic or self-serving behaviors. The steward receives greater personal satisfaction when the organization is successful and therefore act...

What is the resource based theory of entrepreneurship? Jay Barney developed the resource based view of the firm, which is a strategic management theory designed to explain why some firms perform better than others even when they occupy a very similar business environment. The resource-based view seeks to explain why some firms perform better than others by looking to the firms’ resources. This contrasts with earlier perspectives, such as  Porter's five forces , which focus on the external environment as sources of threats and opportunities. The core idea behind the resource-based view is that  competitive advantage  comes from a firm’s effective use of tangible and intangible resources or assets. Tangible assets include plant, equipment and even human resources, whereas intangible assets include things like  trade secrets  and  corporate reputation . VRIO Resources that are valuable, rare, and difficult to imitate or substitute are considered t...