New McQuinn Working Paper: “Capabilities and Strategic Entrepreneurship in Public Organizations”

Capabilities and Strategic Entrepreneurship in Public Organizations

Peter G. Klein
University of Missouri and Norwegian School of Economics

Joseph T. Mahoney
University of Illinois

Anita M. McGahan
University of Toronto, Harvard Business School, and Massachusetts General Hospital

Christos N. Pitelis
Cambridge University

Forthcoming in Strategic Entrepreneurship Journal

Abstract: Public organizations are relatively understudied in the strategic entrepreneurship literature. In this paper, we submit that public organizations are usefully analyzed as entities that create and capture value in both the private and public sectors, and that a capabilities lens sheds important new insights on their behavior. As they try to create and capture value, public organizations can act entrepreneurially by creating or leveraging bundles of capabilities, which may then shape subsequent entrepreneurial action. Such processes can involve complex interactions among public and private actors. For example, public organizations often partner with private firms to produce existing products, create new products, and establish new markets, which in turn generate new capabilities for both public and private actors. Yet such co-evolutionary processes are not guaranteed to create value, and capabilities acquired in the pursuit of public interests may, over time, enable activities that damage those same interests. We show how a capabilities approach helps explain the nature and evolution of public organizations and we apply this approach to a series of cases on the growth and diversification of public organizations, the private provision of public goods, and related issues.

The Knowledge Requirements of the Successful Entrepreneur

Hayek famously argued that prices embody information and that economic actors, responding to price changes, act as if they knew the underlying circumstances generating these changes. “[I]n a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.” To economize, people don’t need “knowledge of the particular circumstances of time and place,” they only need access to prices. “The mere fact that there is one price for any commodity . . . brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.” Hayek illustrates with his famous example of the tin market: “All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply.”

Hayek offers a powerful argument against interference with the price mechanism. But we should remember that prices embody information about the past, and the entrepreneur’s job is to anticipate, or “appraise,” the future. Entrepreneurs, far from discovering and exploiting “gaps” in the existing structure of prices, deploy resources in anticipation of expected — but uncertain — profits generated by future prices. For this, they rely on what Mises called a “specific anticipative understanding of the conditions of the uncertain future,” an understanding that requires a lot of knowledge of particular circumstances of time and place!

The knowledge requirements of the successful entrepreneur or arbitrageur are vividly illustrated in this passage from Carsten Jensen’s magnificent novel, We the Drowned, in a passage about 19th-century ship brokers, entrepreneurs who own, lease, and manage ships and shipping contracts:

A ship broker needs to know how the Russo-Japanese War will hit the freight market. He doesn’t need to be interested in politics, but he has to pay attention to his skippers’ finances, so a knowledge of international conflict is essential. Opening up a newspaper — he’ll see a photograph of a head of state and if he’s bright enough, he’ll read his own future profits in the man’s face. He might not he interested in socialism, in fact he’ll swear he isn’t: he’s never heard such a load of starry-eyed nonsense. Until one day his crew lines up and demands higher wages, and he has to immerse himself in union issues and other newfangled notions about the future organization of society. A broker must keep up to date with the names of foreign heads of state, the political currents of the time, the various enmities between nations, and earthquakes in distant parts of the world. He makes money out of wars and disasters, but first and foremost he makes it because the world has become one big building site. Technology rearranges everything, and he needs to know its secrets, its latest inventions and discoveries. Saltpeter, divi-divi, soy cakes, pit props, soda, dyer’s broom — these aren’t just names to him. He’s neither touched saltpeter nor seen a swatch of dyer’s broom. He’s never tasted soy cake (for which he can count himself lucky), but he knows what it’s used for and where there’s a demand for it. He doesn’t want the world to stop changing. If it did, his office would have to close. He knows what a sailor is: an indispensable helper in the great workshop that technology has made of the world.

There was a time when all we ever carried was grain. We bought it in one place and sold it in another. Now we were circumnavigating the globe with a hold full of commodities whose names we had to learn to pronounce and whose use had to be explained to us. Our ships had become our schools. They were still powered by the wind in their sails, as they had been for thousands of years. But stacked in their holds lay the future.

[Cross-posted at Organizations and Markets]

The Continued Misuse of the “Opportunity” Construct

I’ve been sharply critical of the “opportunity discovery” perspective in entrepreneurship studies (e.g., here, here, and here). A post by Thomas Eisenmann on today’s Harvard Business Review’s Blog Network reminded me of these criticisms. The post elaborates on Howard Stevenson’s famous definition, entrepreneurship as “the pursuit of opportunity beyond resources controlled.” There are many problems with this definition, some discussed in an earlier post by Per. Much of the research literature, including not only my stuff but also important contributions from Sharon Alvarez and Jay Barney, Saras Sarasvathy, Per Davidsson, and others challenges the idea the profit opportunities exist, objectively, waiting to be discovered. Entrepreneurs don’t pursue “opportunities,” they pursue goals, plans, ideas, or visions, which require real resources to pursue, and which may or may not be realized.

Actually the HBS working definition of opportunities, as elaborated by Eisenmann, sounds much like the subjectively perceived goals I have in mind:

“Opportunity” implies an offering that is novel in one or more of four ways. The opportunity may entail: 1) pioneering a truly innovative product; 2) devising a new business model; 3) creating a better or cheaper version of an existing product; or 4) targeting an existing product to new sets of customers. These opportunity types are not mutually exclusive. For example, a new venture might employ a new business model for an innovative product. Likewise, the list above is not the collectively exhaustive set of opportunities available to organizations. Many profit improvement opportunities are not novel–and thus are not entrepreneurial–for example, raising a product’s price or, once a firm has a scalable sales strategy, hiring more reps.

These are just Schumpeter’s examples of innovation. They describe the entrepreneur’s plans, not anything in the objective environment. They certainly have little to do with the notion of opportunity emphasized by Israel Kirzner and adopted by Scott Shane.

Fine, you say, this is just a terminological quibble. When the HBS entrepreneurship group says “opportunities,” they mean business plans. But this is an awkward and confusing usage, one that lends itself easily to misunderstanding. Consider dictionary definitions of “opportunity.” Merriam-Webster gives us

  1. a favorable juncture of circumstances (the halt provided an opportunity for rest and refreshment)
  2. a good chance for advancement or progress

Or, if you prefer the Oxford English Dictionary, try this:

  1. a time or set of circumstances that makes it possible to do something (increased opportunities for export; the night drive gave us the opportunity of spotting rhinos)
  2. a chance for employment or promotion (career opportunities in our New York headquarters)

These definitions clearly describe outside circumstances, objective and external to the actor, not the actor’s personal, subjective beliefs. But the only reasonable meaning of entrepreneurial opportunities refers to the latter. In plain English, opportunities are not at all like “opportunities” as used by HBS.

Isn’t it time we dump the “opportunity” construct altogether?

Panel on Innovation and Opportunities in US Agriculture

I’ll be at the National Chamber Foundation Wednesday, December 19, for a one-day event on “Agriculture: Growing Innovation & Opportunities.” Keynote speakers include US Agriculture Secretary Tom Vilsack, Chamber of Commerce President  Tom Donohue, and Cargill CEO Gregory Page. I’m moderating a panel with industry and government representatives on innovation and US producers’ responses to growth opportunities. Agriculture in the US, as elsewhere in the developed world, faces a conundrum: Innovation and entrepreneurship are closely linked to uncertainty, experimentation, and what Joseph Schumpeter famously called “creative destruction,” the constant churn of products and firms rising and falling through competition. But agricultural policy is largely designed to maintain the status quo — e.g., “protecting the family farm.” Can these objectives be reconciled? We’ll see what the panelists have to say.

Creativity: Burst of Inspiration or Careful Research and Revision?

Keith Sawyer reminds us that much of what we think we know about artistic creativity is wrong:

You’ve probably heard lots of stories about famous creators who supposedly created an entire work in a fit of inspiration, generating something so perfect that they never modified it. Mozart is said to have composed in bursts of inspiration (you can see it in the movie Amadeus); the Romantic poet Samuel Coleridge has the same reputation. And guess what? These stories are just as false as the myths about Jackson Pollock.

  • Music historians have known since the 1960s that “Mozart’s creative process was controlled by a consistently practical approach to the business aspects of music” and that “his manuscripts show evidence of careful editing, revision, and hard work” (Explaining Creativity page 339).
  • Coleridge experts have known since the 1920s that he fabricated his own stories about writing poems in a fit of inspiration. The famous poem “Kubla Khan,” for example–which Coleridge claims to have written in a drug-induced haze–went through many revisions that still exist. Among his Romantic-era colleagues, Coleridge was so famous for making up false stories about inspiration, they would often tease him about it (Explaining Creativity page 322).

No great work ever emerges fully formed from the mind. People become known as “exceptional creators” not because of the power of their inspiration, but because of the intensity and dedication of their work process; because of their ability to stay focused through multiple revisions; and because of their ability to negotiate a zigzag path from the first glimmer of an idea to the final full-fledged work.

The same applies to entrepreneurial creativity. This relates to the challenges posed by the bricolage and effectuation approaches to the opportunity-discovery model that has dominated the entrepreneurship research literature. Ideas for projects, activities, and new firms may occur to us in a flash of insight, but they do not constitute “entrepreneurship” until the hard work of acquiring, deploying, and reconfiguring resources takes place.

Entrepreneurial Missouri

We’ve written before on entrepreneurial activities in our home state. Here’s a Forbes piece from Kauffman’s Lesa Mitchell celebrating Kansas City as the heart of an entrepreneurial ecosystem:

Kansas City is not only in the heart of America, it is in the heart of what’s known as the Silicon Prairie. Opportunities for educational, experiential and entrepreneurial growth continually expand in our urban core, attracting innovators of all ages and interests. Maker Faire KC, one of only four cities outside of California to hold a major Maker event this year, brings inventors, builders and dreamers from varied fields together, helping them create the relationships that build and sustain entrepreneurial success. The promise of the world’s fastest Internet access via Google Fiber is attracting innovators to KC from around the country and helped inspire the just-emerged entrepreneurial neighborhood, KC Startup Village, and Home for Hackers. Startup Weekends are a regular happening here, and the Kauffman Foundation’s own 1 Million Cups and Kauffman FastTrac provide unequalled education and networking opportunities to help entrepreneurs start and grow their companies.

McQuinn Center in the News

Sunday’s Columbia Tribune ran an excerpt from my recent book chapter on entrepreneurship and policy, under the provocative title “Get Government Out of the Way: Entrepreneurs Need Freedom to Prosper.” The longer essay isn’t available online but you can read chunks courtesy of Google Books.

Addendum: I discussed the essay, and entrepreneurship and policy more generally, on the November 19 episode of the Denver-based Start-Up Show.

Ivo Zander at Missouri, on Art and Entrepreneurship

Ivo Zander is a keynote speaker at the Cultural Bricolage conference co-sponsored by the McQuinn Center. Zander is Anders Wall Professor of Entrepreneurship at the Department of Business Studies, Uppsala University. He speaks Tuesday, November 13, 10:15-11:15, Stotler Lounge, Memorial Union, on “Art and Entrepreneurship: Together and Apart.” Come join us!

Shaker Zahra at Missouri, Friday 19 October

Hibbs/Middlebush Speaker 2012

Shaker A. Zahra

Department Chair, Robert E. Buuck Chair of Entrepreneurship, Professor of Strategy & Organization, and the Academic Director of the Gary S. Holmes Entrepreneurship Center in the Carlson School of Management at the University of Minnesota

“Creation of Novelty: Integrative Capability and Knowledge Conversion”

Friday, 19 October
205 Cornell Hall
2:00-3:30PM

Novelty is a key source of strategic heterogeneity, the foundation of competitive advantage in fast paced markets. Whether in products, processes, organizational or business models, novelty is grounded in a firm’s knowledge, which is often abstract and cannot be readily used to create novelty. This makes it essential for companies to translate (“convert”) this knowledge into more concrete concepts that they integrate to generate novelty. In this study, I empirically illustrate the powerful effect of having an organizational-wide integrative capability on converting the knowledge embodied in a firm’s portfolio of patents into radically new products. Preliminary analyses show that complex non-linear relationships exist between the knowledge domain breadth and unrelatedness of the patent portfolio with new product radicalness. Closeness to the state of art/science is positively related to novelty. Implications for building the knowledge conversion and integrative capabilities of the firm as well as the knowledge and capability perspectives are discussed.

__________________________

Shaker A. Zahra is the Department Chair, Robert E. Buuck Chair of Entrepreneurship and Professor of Strategy & Organization in the Carlson School of Management at the University of Minnesota, where he is also the Academic Director of the Gary S. Holmes Entrepreneurship Center. He has been a visiting or guest professor at several universities around the globe. He also holds the 3TU Chair in International Entrepreneurship at the University of Twente, the Netherlands.

Professor Zahra’s research focuses on: entrepreneurship in global technology industries international entrepreneurship, and capability development. His research has appeared in leading journals that include the Academy of Management Journal, Academy of Management Review, Strategic Management Journal, Organization Science, Journal of Management, Journal of International Business Studies), Journal of Management Studies, Journal of Business Venturing, Journal of Organizational Behavior, Decision Sciences, Information Systems Research, Industrial & Corporate Change, Research Policy, Human Relations, Academy of Management Learning & Education, Academy of Management Executive, and Academy of Management Perspectives, among others. Dr. Zahra has also published or (co) edited 12 books and conference proceedings.  Dr. Zahra’s research has received several grants and awards for excellent Research, Teaching and Services from national and international organizations.

Summary of Organizing Entrepreneurial Judgment, chapters 4-7

Following up the previous post; John Dellape’s summary of chapter 4 — probably the heart of the book — is here, and his summary of chapters 5-7 is here. Enjoy, and thanks John!

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