lecture 2 Flashcards
Small firms spur the gale of creative destruction:
Start-up Entrepreneur
Instigator of change
Develop the idea/technology/concept/”way of oding things”
What enables the small firm a head start
Knowledge advantage
Key individuals - e.g. Founders, Investors (such as VCs)
Market positioning advantage
Entrepreneurship highlights the importance of innovation -
considered as a reconmination of resources that disrupts economies equilibria. Small firm can induce knowledge discontinuities (technical and market) and pioneer a new way. A few modern examples:
Google, by launching its search engine in 1998
OpenAI, by launching ChatGPT
Amazon dented brick and mortar businesses (e.g. barnes and noble bookstore chain)
Classical examples: Canon (dismantled Xeros’s position; Apple dethroned IBM)
Small firm product innovation processes comprise a combination of
effectuation locig in early stages in innovation development, say a new product (these days the minimum viable product - MVP)
Effectuation takes a set of means as given and focus on slecting between possible effects that can be created with that set of means
In effectual logic, ideas often concern how to use resources creatively for new products, thus forming a bridge from resources to goals
Guided by effectual logic, startups innovation efforts tend to be stepwise and open ended guided by access to resources
Small firm innovation (startups, new ventures)
Ideation
Experimentation/selection/hybrid entrepreneurial acts
Resource assembly
–>
Financing, development
–>
monetization
small firm maladies
lack of resources and networks
Lack of organizational history/experience, knowledge repositories and stable organizational processes and routines
Lack of legitimacy and credibility
THIS LEADS TO
Erect barriers to transact with resource-providers, intermediate suppliers, customers
Small firm maladies (2)
small firms often focus on making creative use of existing resources, including technologies at hand,e xisting competences and already accessible external relations
Innovation projects rooted in specific labor, production capacity, skills and equipment already available in house, and personal connections, limiting investments to what start-ups could afford
Resource contraints imply judicious use of available resources; seek efficiency and minimum loss; sequential rationality
sources of ideas, knowledge, and opportunities
Small firm innovation
Locial technical, social, and user environmenet
Resource capital, assets, human capital
Prior work experience of employees; prior failure-experience
Social capital and embeddedness in local entrepreneurial and innovation context
Creativity and personal traits (e.g. self-efficacy, tolerance for ambiguity, experimental attitude)
Opportunities for innovating
what is the market opportunity
What is the status-quo, what is the problem, what new things can be brough in, how can it be done differently, what different inputs will we require, who can be our initial customer base
Value chain perspective - What are the nature of upstream downstream linkages in the industry
Entrepreneurial proclivities and capacities play a central role in opportunity recognition and capture
A first kind of start-ups will likely have a concrete specific devices and techniques
Others will typically have nothing concrete, but imagine prospects for further application of the technology or skills learned at prior employment
Entrepreneurial strategy for addressing two related problems
1) Resources for value creation
Sourcing technical, financial, and commercialization capital
Collaborations, alliences
e.g. R&D alliances, venture capital investors and angel investors
Crowd sourcing strategies
THESE THREE LEAD TO
However, a key challenge: adverse selection risk in various markets - input resources and output markets
Information economics: the classical “lemons” problem for small firms
Signal their “quality” to mitigate
2) Capture value from innovation
Contracting problems and misrepresentation risk
The risk of non-verifiability of information and innovation quality (i.e. hidden information risk)
The risk of non-observability of actions (i.e. hidden actions risk)
THESE THREE LEAD TO
Impair negotiation and bargaining power in various resource-based partnerships
Weak bargaining power diminishes prospects for value-capture
Attracting clients and customers, retaining their “loyalty” can be a costly task
Founders of small firm innovation
Founders –> startup
–> Experience or knowledge
Fournders track record and credentials, networks
Prior employment history and various social ties of founders and organizational members - human capital and social capital
Opportunity exploration - Analysis of the external environment and stakeholders (a stakeholder perspective)
Opportunity exploration
market analysis
Competitor analysis
Community analysis
Interest group analysis
Government analysis
Paradigm analysis - status-quo of a product or service
A stakeholder perspective guides legitimacy-building strategies to garner resources and the support of key actors around the firm
Interdependent components of start-up innovation strategy
IP strategy
(Patents, trademarks, copyrights, secrecy)
Organizational strategy
(vertical and horizontal boundaries)
Financial strategy
financial contracts (laon covenants, options, staging)
types of financing (outside vs self, debt vs equity)
product market strategy
product (price, margin, quality, differentiation vs cost based, targeted sales growth
Digital marketing strategy
(digital and AI tools, social media)
Demand-pull and technology-push innovations on the protein market in the food industry
inputs: COmputational breeding and engineered proteins, pea protein, soy protein, wheat protein, chickpea, algae
Processing: texturing and extrusion, dehydration, shear cell, biocreators/fermentation
Formulation: Flavorings coatings and colourings
Products: plant-based meats, dairy, seafood; clean meats, dairy, seafood; plant-based eggs
Distribution: restaurants, retail
Food formulation is a multi-step process that takes a food idea from conception to the grocery aisle. While simple in theory, it involves a lot of innovation, technique, and trial and error
Strategic trade-offs and challenges for small firm innovation
Being innovative and investing in innovation vs Capturing value from innovation vs Protecting innovation
Being innovative and investing in innovations
(buildd capabilities; mobilize resources; manage R&D)
Capturing value from innovations
(commercialization speed, linkages and integration without robust value-chains)
Protecting innovation
(limitation barriers (appropriability conditions))
ensuring tight access restrictions; manage a cavalry of IP attorney; engage in litigious activity
Processes for feedback, information exchange, and coordination
R&D/idea development –> production/manufacturing –> marketing & sales –> customer service
As one reflects on the need for and efficacy of these strategies - internalize vs contract, draw on your knowledge of concepts concerning vertical integration decision
Tradability of various complementary assets (easy to specify or identify?)
Economics of contracting (bilateral setting)
-Transaction costs from asset specificity
-Control and coordination of activities
complementary assets and their criticality across value chain for development 4x4
Investment scale major, criticality to success high: (internalize (but if cash contrainded take minority position))
Investment scale major, criticality to success small: (Do not internalize (contract out))
Investment scale minor, criticality to success minor: (internalize(or take majority ownership))
Investment scale minor, criticality to success minor: (discretionary)
Appropriability regimes
The term “appropriability” refers to the ability of an innovator (a firm or individual) to appropriate some of the social gains that result from an innovation (think abstract when you think about innovation)
Appropriability regime determines the extent to which knowledge and innovations can be protected from imitation
4x4
Imitation costs high, IP rights loose:
Moderate appropriability
Imitation costs high, IP rights tight:
Strong appropriability
Imitation costs low, IP rights loose
Weak appropriability
Imitation costs low, IP rights tight
Moderate appropriability
Two critical drivers of small firm innovation strategy
Access to commplementary assets
-Knowledge captial
-Financial capital
-commercialization capital
The characteristics of these assets vary across industries and intertemporally within industries
PLUS
Safeguards against the risk of imitation and appropriation
Although, knowledge is intangible and tacit, the risk of imitation is non-trivial
Firms face employee mobility risks
IP infringement and litigation
A decision framework for consolidating the risks and innovation development strategy responses
Innovation requires complementary assets:
NO: Commercialize immediately
YES: specialized complementary asset
NO: Contractual arrangement to access
YES: appropriability weak?
YES: criticality of hte specialized c. asset
HIGH: cash available?
YES: Imitation risk
High:integrate assets
Internal deployment (often costly)
INterorganizational deals (less costly, yet risky)
