NOTES
PREFACE
1. The topic of how entrepreneurs succeed in creating wealth in the face of fundamental uncertainty has figured prominently in the work of Kirzner (1973, 1997), Knight (1921); Hayek (1945); and of course Schumpeter (1950). Venkataraman (1997) has suggested that a focus on markets of the future is a distinctive contribution of the study of entrepreneurship. We would argue that creating future new businesses is the distinctive focus of an entrepreneurial mindset.
2. The Citibank study represents our first major collaboration. Called Citiventures, the project was a three-year field study of dozens of corporate ventures started in the bank. During the study, we observed many attempts at new business creation within a single firm. We conducted over three hundred interviews for this project, involving managers at every organizational level and in most parts of the business. Insights from earlier studies of the corporate venturing process can be found in Block and MacMillan (1993); and Starr and MacMillan (1990).
3. McGrath (1997); McGrath (1996); McGrath (1999); McGrath and MacMillan (2000). See also McGrath, MacMillan, and Tushman (1992); MacMillan and McGrath (1994).
4. McGrath (1993); McGrath, MacMillan, and Venkataraman (1995); McGrath et al. (1996); Nerkar, McGrath, and MacMillan (1996); McGrath (1998).
5. MacMillan, Zemann, and SubbaNarasimha (1987); Hambrick, MacMillan, and Day (1982); Hambrick and MacMillan (1984); MacMillan, Siegel, and SubbaNarasimha (1985); Macmillan, Block, and SubbaNarasimha (1986).
6. MacMillan and Day (1987); MacMillan, McCaffery, and Van Wijk (1985); Chen and MacMillan (1992); MacMillan (1988); McGrath, Chen, and MacMillan (1998); D’Aveni (1994).
7. McGrath and MacMillan (1995); Block and MacMillan (1985). See also Low and MacMillan (1988).
8. MacMillan (1987); MacMillan (1983); Guth and MacMillan (1986); MacMillan (1986); McGrath, Venkataraman, and MacMillan (1992); Venkataraman, MacMillan, and McGrath (1992); McGrath (1995).
CHAPTER 1: NEEDED: AN ENTREPRENEURIAL MINDSET
1. Henry Schacht, former CEO of Lucent Technologies, gave us this phrase.
2. MacMillan first made this argument well over a decade ago. The importance of understanding habitual entrepreneurs is now being recognized by the academic community (MacMillan 1986; Birley and Westhead 1993; Wright, Westhead, and Sohl 1999).
CHAPTER 2: FRAMING THE CHALLENGE
1. Christensen (1997).
2. An excellent description of visions that work can be found in Collins and Porras (1994).
3. For instance, Garud and Nayyar (1994) make the point that it is the organization’s ability to recall technologies and ideas over time that often leads to substantial competitive advantages.
CHAPTER 3: BUILDING BLOCKBUSTER PRODUCTS AND SERVICES
1. Drucker (1973).
2. The attribute map and its use were first described in MacMillan and McGrath (1996). For additional reading on marketing, attributes, and positioning in general, a good place to start is Kotler (1994). See also Day (1990) on marketing and strategy. For attributes of information goods, see Shapiro and Varian (1998).
3. Dos Santos and Peffers (1995).
4. See the Web sites www.mindspring.net/aboutms/history.html and http://www.hoovers.com.
5. Hart and Milstein (1999).
6. Clark and Fujimoto (1991).
7. Reichheld (1996).
8. Silverman and Osterland (1999).
9. For a great description of sorting out what customers would like from what they will pay for, see Greg Brenneman’s (1998) description of deciding what services Continental Airlines would offer after its turnaround.
10. The data in this example is drawn from a Harvard Business School case, “Progressive Corporation” [N9-797-109].
11. Brenneman (1998).
12. See Brown and Eisenhardt (1998) for additional descriptions of how this works.
13. Abernathy and Clark (1985); Christensen (1997).
14. Dana Canedy and Reed Abelson, “Can Kellogg Break Out of the Box?” New York Times, January 24, 1999.
15. Porter (1980).
16. Schoemaker and van der Heijden (1992); Schoemaker (1992).
17. Van der Heijden (1996).
CHAPTER 4: REDIFFERENTIATING PRODUCTS AND SERVICES
1. MacMillan (1975).
2. Conversation with Bernie Gunther, a principal at MMG, October 4, 1999.
3. McGrath and MacMillan (1997).
4. Jamie Beckett, “Oral-B Polishes Sales with Blue Dye,” San Francisco Chronicle, January 2, 1992.
5. “Popular Science Awards Energizer ‘Best of What’s New’ Title,” PR Newswire Association, Inc., November 12, 1996.
6. For intriguing ideas about how smart, widely dispersed, and interconnected machine intelligence may create huge opportunities, see Kelly (1997) and Evans and Wurster (1997). The information on “smart trucks” was taken from Tapscott (1995).
7. Brock Yates, “I’ll Trade You Two Camels for One New Car,” Washington Post Magazine, Sunday final ed., September 6, 1987, 237.
8. “Mobile Speedpass Surpasses Three Million Users—Innovative Payment Technology Sets Standard for the Next Millennium,” Business Wire, August 31, 1999.
9. Aldo Morri, “Wireless to Monitor Elevators,” Wireless Week, July 20, 1998.
10. Paul Kemezis and Jim Cowhie, “Industrial Gases: Prospects Brighten in ’95,” Chemical Week, February 22, 1995.
11. Lucio Guerrero, “E-Tailer’s Return Policies Critical,” Chicago Sun-Times, December 26, 1999; Eric Wieffering, “Dayton Hudson to Roll Out New Target Web Site Return Policy” Minneapolis Star Tribune, August 28, 1999.
12. This segment actually exists—MacMillan and his wife buy cars in this way. This type of buyer is the automaker’s dream, as long as it is your make of auto they are buying!
CHAPTER 5: DISRUPTING THE RULES OF THE GAME
1. As of this writing, Amazon.com is alive and well—whether the business model works is yet to be seen.
2. This section builds on McGrath, MacMillan, and Tushman (1992) and MacMillan and McGrath (1994).
3. Tushman and Anderson (1986); Christensen (1997); Utterback (1994).
4. Porter (1998).
5. Go to the e-STEEL.com Web site. Two other excellent sites for obtaining news of developments like this can be found at estats.com and DeepCanyon.com, both focused on information industries.
6. Business Week, June 1, 1999.
7. Aldrich and Fiol (1994) highlight many of the difficulties facing firms attempting to compete in brand new industry spaces that are not yet taken for granted. Among them are difficulties in getting transaction partners to sign up, difficulties with regulatory and other authorities, and a general lack of legitimacy that can cause the business to have trouble acquiring resources.
8. Actual trade-offs of multiple attributes can be tackled using conjoint analysis techniques like those in the Bundopt software package developed by Green and Krieger at Wharton in 1996. Conjoint analysis is an analytical technique in which respondents choose among different combinations of attributes. The combinations are selected and presented so as to allow a statistical analysis that identifies the combination of attributes that is most attractive to the respondents.
9. This assumes, of course, that the evolution of existing products (such as the increasingly ubiquitous PALM handheld devices) doesn’t satisfy these needs well enough.
10. For an excellent discussion of how to build world-class, breakthrough value chains by forming alliances, see Doz and Hamel (1998).
CHAPTER 6: BUILDING BREAKTHROUGH COMPETENCES
1. The implications of firms’ dependency on external resource providers for their survival are forcefully laid out in Pfeffer and Salancik (1978).
2. See, for example, Vasconcellos and Hambrick (1989).
3. This does not imply that the organizational components delivering the numbers are simple. Indeed, most highly successful organizations deliver their key ratios through a mutually reinforcing complex of interrelated practices, one reason that traditional benchmarking has so often led to disappointment. See Nadler and Tushman (1988); Porter (1996); and Levinthal (1997) for academic perspectives on this.
4. See Reichheld (1996) for some excellent ideas on how to get at the essentials of this kind of negative customer assessment. He outlines useful ideas for assessing the reasons for customer defection and for doing something about it.
5. This sort of response by people in the company is to be expected at first, because it is usually hard for people working in one area to see systemic problems. Addressing this tendency created enormous demand a few years back for systemwide approaches, such as business process reengineering. Our major reservation with business-process-reengineering-like approaches is that in the zeal to eliminate redundant or inefficient operations, many good and innovative ideas also get eliminated, leaving companies lean but unable to generate new businesses. See Levinthal and March (1993) for a theoretical analysis of dilemmas of this sort.
6. McGrath et al. (1996).
7. McGrath (1998).
8. We can use this example because these competences have since diffused and are now commonplace in the industry.
9. Conversation with GEFS manager, 1993.
10. This is one reason, we believe, that fewer companies are looking to strategies based on products alone as opposed to bundling products with processes and services. It is much easier to imitate and improve on a product because the innovators’ insights are already codified into definable functionality. It is much harder to imitate a complex product plus service plus information transaction. Witness the success of Japanese and other Asian firms in product innovation versus their struggles with competing in services, such as international banking. This is a further reason for the decline of patenting as a source of competitive protection in all but a few industries (such as pharmaceuticals and advanced materials).
11. This, by the way, can account for disappointing results from a benchmarking effort—benchmarking the outcomes of a competence creation effort often leaves out the actual drivers of why it works in the first place.
12. Among our personal favorites are the books by Slywotsky and associates, such as Value Migration and The Profit Zone.
13. The periodical Value Line Investment Survey is available in most public libraries and on-line.
14. Fuld (1995) is a good reference on intelligence capabilities and offers a wealth of ideas for sources of data.
15. The idea that group-level comprehension of the relationships between actions and desired firm-level outcomes is a critical driver of performance can be traced to Weick and Roberts (1993). The importance of this relationship to organizational efforts to create new distinctive competences (and subsequent competitive advantages) was empirically tested in McGrath’s dissertation (McGrath 1993) and subsequent articles drawing from this conceptual base.
CHAPTER 7: SELECTING YOUR COMPETITIVE TERRAIN
1. This is the well-known trade-off between exploring new knowledge and exploiting existing knowledge (March 1991).
2. The idea of a strategic terrain and competing for arenas within this terrain is derived from Kauffman’s (1993) concept of a fitness landscape in biology and is applied to problems of strategy by scholars such as Levinthal (1997).
3. This is one reason that the pursuit of large market shares is not always the best way to win from a strategic point of view.
4. Singh (1986).
5. Garud and Kumaraswamy (1993).
6. Multiple-business companies can also stratify their different divisions, to help think through portfolio decisions.
7. At this stage, in the interest of simplicity, we have not discussed new businesses, or corporate ventures. We will get to corporate ventures in chapter 12. Meanwhile, if your register contains such ventures, they should also be categorized as arena building.
8. So, we have had Porter’s justly famous “five forces” model (1980); the Boston Consulting Group’s product/portfolio matrix (Henderson 1980); and the GE business attractiveness matrix and various other influential ideas for measuring attractiveness. These were useful tools when they were developed, and they remain useful today. As with any tool, however, one needs to be careful about the conditions under which they work. Under increasing uncertainty, many core premises of these models (e.g., stable value chains and relatively clear industry boundaries) fail to hold.
9. McGrath (1997); MacMillan, Siegel, and SubbaNarasimha (1985).
10. Data from www.pfizer.com.
11. This is a point made by Christensen (1997).
12. “Genetically Modified Food: Food for Thought,” Economist, June 19, 1999, 19–21.
13. Lieberman and Montgomery (1988).
14. Saba (1999).
15. We use surveys to capture the information, using a 1-to-7 scale, in which a score of 1 is low (disagree completely) and a score of 7 is high (agree completely). For us to consider a score high or low, the average has to be above 5. If we have data from a team, we average the individual responses to obtain a team score. See McGrath and MacMillan (2000).
16. See Harrigan (1980).
17. Today, Gillette’s new CEO is about to embark on a similar process of rigorously evaluating the contributions made by some of the underperforming divisions (such as Waterman pens) in the company, with the possible result that they will be sold.
18. A seminal book on the topic of resource allocation is Bower (1970), whose framework was applied to the corporate venturing process by Burgelman (1983; 1988; 1991).
19. McGrath, Venkataraman, and MacMillan (1992).
20. Schon (1963); Chakrabarti (1974); Day (1994); Ginsberg and Abrahamson (1991).
21. See Itami (1987). See also chapter 6 in Block and MacMillan (1993) on locating new business development efforts.
22. For an extensive discussion of managing the politics involved with new business development strategies, see Block and MacMillan (1993), chapters 10 and 11.
23. There are several excellent references available on how to manage internal politics. See Pfeffer, Managing With Power (1992); Tushman and O’Reilly, Winning through Innovation (1997); and MacMillan and Jones, Strategy Formulation: Political Concepts (1986). For a detailed look at the use of power and its consequences, a classic remains Robert Caro’s biography of Robert Moses, The Power Broker (1974).
24. The Economist, June 19, 1999.
CHAPTER 8: ASSEMBLING YOUR OPPORTUNITY PORTFOLIO
1. Brown and Eisenhardt (1998) observe that a distinguishing characteristic of firms able to cope with high-velocity change is that the development priorities are clear throughout the company.
2. Bowman and Hurry (1993); Kogut (1991); McGrath (1997).
3. Black and Scholes (1973).
4. Coy (1999); Belanger (1999).
5. Scouting options have been called “probes” as well (see Brown and Eisenhardt 1998).
6. For the sacrificial product, see Lynn, Morone, and Paulson (1997). For the probe, see Brown and Eisenhardt (1998).
7. McGrath and MacMillan (1995). See also Block and MacMillan (1985). We pursue this in detail next in chapter 8.
8. McGrath and Boisot (1998); Ashby (1956).
9. Or what the late Ned Bowman dubbed “a bundle” of options.
10. Information on AT&T from Hoovers’ on-line company profile at www.hoovers.com.
11. Baldwin and Clark (1997).
12. This approach is consistent with Wheelwright and Clark’s (1995) approach to getting a handle on what products are in the pipeline—we extend this concept to look broadly at the business ideas you might explore.
13. Galbraith (1973) long ago observed that when faced with overload and no way to increase the processing capacity, a system has few choices other than to buy itself time by lowered performance.
CHAPTER 9: SELECTING AND EXECUTING YOUR ENTRY STRATEGY
1. D’Aveni (1994) has a book full of wonderful examples of hypercompetitive interchanges in a variety of different industries.
2. Venkataraman (1989) was one of the first to explicitly recognize the importance of the transaction set—the set of initial customers, suppliers, buyers and others with whom a fledgling venture interacts. He found that when partners left the transaction set of a fledgling business, its vulnerability increased dramatically, as the founding team had to scramble to replace defections from the set of transaction partners.
3. See Christiansen (1997) for more on this. His main thesis is that attending to the needs of good current customers can systematically inhibit a business from understanding the needs of new customers.
4. Von Hippel (1988) calls these lead users.
5. Stinchcombe (1965) first drew scholarly attention to this issue with a famous treatise on the liabilities of newness. Among these liabilities are a lack of legitimacy and reputation with which to persuade potential customers (and other allies) that new, young businesses will be sustainable and trustworthy and will fulfill their obligations. Endorsement of what a new business is doing by high-status individuals and firms is a potent way of overcoming these liabilities. This is borne out by recent empirical research. Stuart, Hoang, and Hybels (1999), for instance, find that new biotech firms endorsed by high-prestige partners were more successful at attracting investment and other forms of support.
6. This may seem trivial, but it isn’t. We have seen quite a few business propositions that made sense for the customer company as a whole that were resisted because the benefits would accrue to some group in the company other than the one making the purchasing decision. This is a case of the reward and incentive structures in the company being misaligned with what is good for it. This happens more than you might think.
7. See, for instance, Chen and MacMillan (1992).
8. Chen (1996).
9. The core theory behind much of this discussion began with Edwards’s (1955) discussion of “mutual forbearance.”
10. The formal term for this is “resource diversion”—see McGrath, Chen, and MacMillan (1998).
11. Grove (1996).
12. Intel subsequently diverted its resources to its then modest—but later spectacularly successful—microprocessor chip business.
13. Mao Zedung (1966).
14. MacMillan (1985).
15. To protect the business, we have used a fictitious product in this discussion.
16. This kind of competitive signaling is thought to lead to the establishment of stable spheres of influence among multiple-point competitors, in which they practice mutual forbearance and refrain from attacking one another directly in important arenas. See Edwards (1955) and Bernheim and Whinston (1990).
17. Myron Levin, “Targeting Foreign Smokers,” Los Angeles Times, November 17, 1994.
18. This discussion also draws on the ideas of Richard D’Aveni, who discusses the pet food industry at length in a teaching note prepared for the Harvard case.
CHAPTER 10: PUTTING DISCOVERY-DRIVEN PLANNING TO WORK
1. People also tend to ignore evidence that contradicts previous assumptions (Kiesler and Sproull 1982). In addition, assumptions may be hard to remember. A famous study by Russ Ackoff (1981), formerly of the Wharton School, found that after six weeks, managers in a typical organization can’t recall half of the assumptions underlying key decisions they had made. This study is a useful analysis of planning pathologies and what can be done about them.
2. Winter (1995) offers an insightful discussion of the role of replication in capturing profits from a strategy.
3. This characterization of the learning process stems from a long stream of research into behavioral learning theory (Cyert and March 1963; March and Simon 1993).
4. See Weick (1979) for a discussion of the concept of enactment and Cheng and Van de Ven (1996) for a discussion of the application of this idea to entrepreneurial behavior. McGrath (forthcoming) also found empirical evidence of the importance of creating variance for learning in a sample of corporate new business ventures.
5. Maister (1982); see also Maister (1993).
6. For a detailed exposition of many different business models we refer you to Slywotsky and Morrison (1997).
7. In the academic literature, the idea that complex combinations of skills, assets, and systems can be a powerful source of competitive insulation is prevalent in both evolutionary economics (Nelson and Winter 1982) and the resource-based view of the firm (Wernerfelt 1984; Teece, Pisano, and Shuen 1997).
8. The concept of assumption-based milestone planning was first articulated by Block and MacMillan (1985).
9. We are grateful to Professor Shuichi Matsuda of Waseda University in Tokyo, Japan, for data on Kao’s floppy-disk venture. We have never had a consulting relationship with the company (indeed, we met representatives only after the illustrative reconstruction of the case was published in the Harvard Business Review).
10. The sections on documenting assumptions and learning from milestones draw heavily from the work of Zenas Block—see Block and MacMillan (1985).
11. The work of Ming Jer Chen shows that competitors are often willing to depress prices to hold share, particularly in the face of irreversible investments (Chen and MacMillan 1992).
12. If Monte Carlo simulations seem like too much work, there is a simple alternative. Run a series of “what if” analyses that take on the upper and lower range of each assumption to find the variables that most affect the outcome.
13. We wish to thank Yasu Kitahara for this insight, which he has incorporated in a software package developed specifically for discovery-driven planning. If you are interested, he is reachable at [email protected].
CHAPTER 11: MANAGING PROJECTS WITH UNCERTAIN OUTCOMES
1. The research on which this chapter was based stems from McGrath’s doctoral dissertation (McGrath 1993). It owes much to the intellectual engagement of her doctoral committee, comprising the late Ned Bowman, Harbir Singh, Jitendra Singh, George Day, and S. Venkataraman. Oh, and MacMillan helped, too.
2. Meyer (1999).
3. McGrath (1993); McGrath, MacMillan, and Venkatraman (1995); McGrath et al. (1996).
4. Wageman (1995).
5. Merriam-Webster’s Collegiate Dictionary, 10th ed., on-line version.
6. Nelson and Winter (1982).
7. One issue with this measure is that people do tend to adjust aspirations based on previous results. We avoid contamination of our results by controlling for this in our research. We included data on the ambitiousness and difficulty of goals over time, in order to avoid being mislead by increases in convergence produced by decreases in ambitiousness of goals (Lant 1992). From a practical point of view, just make sure that people are not being too easy on themselves.
8. Barney (1986).
9. Williamson (1991).
10. MacMillan, McCaffery, and Van Wijk (1985).
11. See Meyer (1999).
CHAPTER 12: THE MOST IMPORTANT JOB: ENTREPRENEURIAL LEADERSHIP
1. Our appreciation of Welch’s accomplishments at GE arise from many years of working with the company as it went through a transformation from being the best-run exemplar of traditional approaches to strategy to being an exemplar of a firm with an entrepreneurial mindset.
2. Jack Welch, speaking at the Zweig Lecture Series at the Wharton School, University of Pennsylvania, February 17, 1999.
3. March and Shapira (1987).
4. Hambrick and MacMillan (1984).
5. We have found that a particular time when entrepreneurial efforts incur intense displeasure is when the reward system for undertaking the risk of starting the entrepreneurial business takes off as a result of the success of the start up, and the internal entrepreneurs begin to generate more rewards than the incumbents of the established businesses.