Capabilities and Strategic Entrepreneurship in Public Organizations

The current issue of the Strategic Entrepreneurship Journal features a special issue on “Entrepreneurship in the Public Interest,” edited by Jay Barney, Anita McGahan, and Bennet Zelner. It features my article, “Capabilities and Strategic Entrepreneurship in Public Organizations” (with Joe Mahoney, Anita McGahan, and Christos Pitelis). Here’s the abstract:

Capabilities and Strategic Entrepreneurship in Public Organizations

Public organizations are relatively understudied in the strategic entrepreneurship literature. In this article, 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 coevolutionary 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.

A Response to Scott Shane

I have written a brief response to Scott Shane, who critiques my critique of his landmark 2000 paper on entrepreneurial opportunities, at Organizations and Markets. For more on the differences between entrepreneurial opportunities and entrepreneurial actions, see my exchanges with Israel Kirzner and with Bob Wenzel.

Academic Entrepeneurship Quote of the Day

From T. W. Schultz, in his 1979 Kaldor Memorial Lecture, “Concept of Entrepreneurship and Agricultural Research”:

Within our universities, academic entrepreneurship is much more important than we realize. Show me a university that allocates its resources in a purely routine manner over any extended period and I will show you that that university is on a declining path. Presidents, deans, and directors of research are obviously academic entrepreneurs. So are heads of departments who are worthwhile having. Nor do I exclude the teaching and research functions of the faculty. The stock of knowledge and the theoretical opportunities in research are not fixed once and for all. Routine teachers are a liability and routine research workers, which contradicts the meaning of research, if nevertheless there are such, they are failures. Not least is the fact that consumption opportunities are also changing, and inasmuch as pure consumption also entails time, here too people are reallocating their own time in response to changing opportunities.

The thrust of my argument thus far is that over our respective life cycles all of us, as well as everybody else, given our dynamic society with special reference to the economy, is an entrepreneur. Whether a person is bad or good in performing this function is quite another matter.

For more on Schultz see this 2006 article by Mike Cook and myself.

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.

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