The Entrepreneurial Mindset: Strategies for Continuously Creating Opportunity in an Age of Uncertainty

487 Pages·2000·3.71 MB·English

Copyright

Copyright 2000 President and Fellows of Harvard College

All rights reserved
First eBook Edition: August 2000
ISBN: 978-0-8758-4834-1
There was homework and hockey and horseback riding
And the book
There was ballet and swimming and baseball
And the book
There was family and music and travel
And the book
There were friends and gossip and dishes
And the book
For Anne, John, and Matt,
Who good-naturedly lived with a book in the midst of our domestic
bliss
RITA GUNTHER MCGRATH

To Jean, whose sacrifices of time and whose emotional investment to
make this book happen cannot be measured.
IAN MACMILLAN
CONTENTS

Copyright
Preface
CHAPTER 1Needed: An Entrepreneurial Mindset
CHAPTER 2Framing the Challenge
CHAPTER 3Building Blockbuster Products and Services
CHAPTER 4Redifferentiating Products and Services
CHAPTER 5Disrupting the Rules of the Game
CHAPTER 6Building Breakthrough Competences
CHAPTER 7Selecting Your Competitive Terrain
CHAPTER 8Assembling Your Opportunity Portfolio
CHAPTER 9Selecting and Executing Your Entry Strategy
CHAPTER 10Putting Discovery-Driven Planning to Work
CHAPTER 11Managing Projects with Uncertain Outcomes
CHAPTER 12The Most Important Job: Entrepreneurial Leadership
CHAPTER 13The Entrepreneurial Edge: When Strategy is Discovery
Notes
Bibliography
About the Author
PREFACE

THIS BOOK SUMMARIZES THE PRACTICAL IMPLICATIONS OF OUR accumulation of
experience, research studies, and active teaching and working with business
organizations attempting to deal with uncertainty and with entrepreneurs
learning to launch and grow their businesses. MacMillan’s early interest in
entrepreneurship stemmed from his experience as an entrepreneur, when he
worked with John Foggitt to create a global travel business based on novel travel
concepts. McGrath also spent time as an entrepreneur, creating first a political
consulting business, then a prototype of what one might recognize as a Kinkos
type of operation called Unworried Words. Neither venture proved sufficiently
attractive to stick with for the long haul, although they were great learning
experiences. She began her academic career after closing these businesses to
pursue an exciting opportunity in the world of information technology design.
We thought that you, our readers, might be interested in the origins of some
of the ideas in this book. The primary thrust of the book—that uncertainty can
yield tremendous opportunity when looked at in the right way—has long been a
topic at the heart of the academic study of entrepreneurship.1
Chapter 2 stems from our experiences with teaching entrepreneurship and
helping would-be entrepreneurs. One of our most consistent challenges was to
get entrepreneurial wanna-bes to make sure that their proposed venture ideas
were worthwhile. Accepting proposals for any old venture inevitably generated
lists of viable, but basically boring businesses (like dog-walking services). So,
we challenged them to think of business concepts that would be worthwhile in
comparison with the opportunities they could have working for a large company.
Without further ado, the insufficiently profitable ideas vanished. The business
equivalent is to make sure at the outset that your ideas have the potential at
maturity to contribute in a worthwhile way to your company. This is what we
call framing the business.
In chapters 3 and 4 we examine ways of seeing existing product and service
offerings in a new light. The material is extensively drawn from fieldwork in
which we have analyzed patterns of opportunity recognition by independent
entrepreneurs and by managers pursuing corporate ventures. We are particularly
fortunate to have worked with Citibank (now Citigroup), Chubb & Son,
American Reinsurance, DuPont, and other companies that showed us how new
opportunities emerged and how these organizations used them as the basis for
new business models.2 By new business models, we mean the way an
organization organizes inputs, converts these into valuable outputs, and gets
customers to pay for them. A business model, in other words, is how a business
is designed to generate profits.
Chapter 5 builds on research in which we worked with managers of
established companies to try to understand their competitive terrain and identify
breakthrough opportunities they might otherwise have missed. This work was
largely driven by McGrath’s deep interest in real options reasoning as an
approach to strategizing under conditions of uncertainty. As the name suggests,
new businesses often begin as options—small, uncertain investments that can
later prove worthy of further investment. Early experiments can be immensely
important later on. Evaluating new technologies as options has been used at
global companies such as Merck, Matsushita, and DuPont. DuPont recently
sponsored a collaboration in which McGrath was the principal investigator and
concluded that the approach gave them a new way to explore opportunities.3
Chapters 6 and 11 draw largely on research based on McGrath’s Ph.D.
dissertation, which involved both extensive fieldwork and survey/analysis of
new businesses involving new products, new technologies, or new markets
begun by established firms. The tools presented in chapter 11 have been used to
diagnose the progress of more than one thousand such new business
development projects of strategic importance to managers involved in our
executive education and research programs.4
The insights into the composition of a company’s portfolio of business
initiatives and the importance of achieving strategic focus and making trade-offs
between attractive projects are presented in chapters 7 and 8. These chapters
draw largely on our observations of many companies and their corporate
venturing programs. Our observations included a four-year engagement by
MacMillan in the General Electric Work Out program and more than a decade of
interactions with GE managers in the company’s Crotonville, New York, facility.
We also drew on some of the earliest empirical work on strategy, taking a
statistical approach to assessing commonly held assumptions in the strategy
arena. One early article, for instance, challenged the widely held belief that
businesses classified as “dogs” in the famous Boston Consulting Group’s
product/portfolio matrix were inherently unprofitable.5
Entry strategies for new markets, the focus of chapter 9, formed a
considerable part of MacMillan’s work on competitive dynamics and were a
major thrust of his research in the late 1980s, as the effects of hypercompetition
began to become evident to managers of even the most staid businesses.
McGrath became involved in applying traditional ideas from competitive
dynamics to highly uncertain business environments.6
Chapter 10 presents discovery-driven planning, an approach we devised to
help managers plan under highly uncertain circumstances. Originating from joint
work with Zenas Block, a co-author of MacMillan’s and a multiple-venture
entrepreneur, the concept of discovery-driven planning departs dramatically
from conventional strategic planning but is no less disciplined. The concepts
underlying it were distilled from Block and MacMillan’s experiences working
with habitual entrepreneurs—people who make a habit of detecting and
exploiting the business opportunities that arise from uncertainty. An article on
discovery-driven planning was the first of several jointly authored pieces
McGrath and MacMillan published in the Harvard Business Review. The
methodology is now being actively used by companies such as Intel, Hewlett-
Packard, Fluor Daniel, Matsushita, and Sonera.7
Chapter 12, a distillation of the practices of entrepreneurial leadership, is
based on massive amounts of fieldwork. Our first projects compared the
behavior of managers of highly successful corporate venture divisions with that
of managers in similar circumstances who appeared unable to create new
business opportunities for their firms. Later work drew on our corporate
venturing studies, such as the Citiventures project we worked on in the early
1990s.8 We refer you to other research studies that we use and build on
throughout the text as appropriate.
Throughout this book, we have provided figures and tables that allow
readers to generate scores and derive conclusions. These materials are all based
on considerable theoretical and empirical research. Readers should be aware,
however, that the way we suggest that managers might use them to inform their
decision making should not be confused with a rigorous empirical methodology.
By necessity, we have simplified the tools and omitted additional variables that
might be used to assess bias, reliability, and generalizability in the interests of
helping practitioners gain some insights into “roughly right” solutions.
The following box provides a more general overview of how this book fits
into scholarly perspectives on strategy.
T S M U
HEORIES OF TRATEGIC ANAGEMENT UNDER NCERTAINTY

Problems of planning and leading under uncertain conditions are pervasive in the
life of any manager, but have not always been central to the theory of strategic
management. Neoclassical economists, for instance, finesse the issue of
disruptive change by focusing on seeking the conditions under which
equilibrium will emerge. Drawing from the neoclassical tradition, strategic
management scholars in the 1940s and 1950s tried to identify the regular
patterns that would be amenable to predictive theorizing.
An early and still useful framework that adopted this approach was known
as the structure-conduct-performance paradigm. The essential argument was that
certain market structures, such as markets spread across geographic regions,
demanded specific organizational responses (such as the creation of a
multidivisional, or M-form, firm to permit greater local discretion than a
headquarters-controlled bureaucracy). Appropriate conduct by the management
of a firm given this market structure would then lead to higher performance.
Uncertainty in the structure-conduct-performance paradigm had to do primarily
with ascertaining which features of the competitive landscape one should pay
attention to. Changes in this landscape were treated as fairly slow-moving and
infrequent.a Strategies, similarly, were seen as relatively stable for a given firm
over time.b
This perspective gained enormous influence with the publication of
Michael Porter’s Competitive Strategy in 1980, a book that gave us a
parsimonious five-forces model with considerable explanatory power.c The
emphasis was on relatively stable features of the landscape and how these could
be influenced in one’s favor. For instance, a strategist might discover how
barriers to entry could be created to limit rivalry. At about this time, consultants
also began to explore the practical implications of relatively stable industry
structures and to develop tools to help managers identify what the main features
of the competitive landscape were, in order to make informed choices. From
about this period onward, for instance, findings regarding strong linkages
between market share and profitability influenced many managers to seek
businesses characterized by high growth and the potential to achieve large share
positions.d
Parallel to this line of thinking was a point of view on strategy that
emphasized the internal capacities and capabilities of firms. The focus in this
view was on change, evolution, and path-dependent progress rather than on
stability, and on internal resources rather than environmental or competitive
characteristics.e Pioneering economists Richard Nelson and Sidney Winter
introduced the idea of evolutionary economics as part of this tradition in 1982.
Among their insights was the idea that firms develop valuable path-dependent
routines but that these are difficult to change. Uncertainty thus presents a major
challenge, because the best resource combination may only be clear after the
fact. The insight stemming from this perspective is that adaptation, new
competence creation, and learning are crucial components of strategic
management.f
Uncertainty, idiosyncrasy, and the unexpected had always featured
prominently in the work of scholars studying entrepreneurship.g Uncertainty was
seen as essential to the capture of profits from creating new combinations of
productive resources, because profit came from an entrepreneur’s perceiving an
opportunity not obvious to others and then investing to capitalize on it.h
Moreover, those individuals and organizations able to create new models for
doing business could replace less effective older models, in the course of what
Josef Schumpeter famously called “gales of creative destruction.”i
The now-familiar list of factors leading to instability in industries and
company strategies (globalization, deregulation, technological change,
information intensity, etc.) are forcing managers today to cope with the kind of
rapid, unexpected change that has long been central to the theory of
entrepreneurship. We believe that the time is consequently right for a new
integration of entrepreneurship and strategic management. The successful future
strategists will exploit an entrepreneurial mindset, melding the best of what the
older models have to tell us with the ability to rapidly sense, act, and mobilize,
even under highly uncertain conditions.j
a. Bain (1959); Chandler (1962).

b. Miles and Snow (1978).
c. Porter (1980); Porter (1985); Porter (1990).
d. One of the most famous frameworks is the Boston Consulting Group’s product-portfolio matrix, which
used insights on experience curve effects and industry growth patterns to inform portfolio and investment
decisions (Henderson 1980).
e. Selznick (1947); Penrose (1959); Nelson and Winter (1982); Wernerfelt (1984); Barney (1991); Dierickx
and Cool (1989); Amit and Schoemaker (1993); Teece, Pisano and Shuen (1997).