Knee-Jerking or Down-Sizing?

HBS Professor Teresa Amabile and psychologist Steve Kramer write on the HBR Blog Network how “knee-jerk downsizing” is a bad idea. The article responds to a recent WSJ article on how already lean companies are ready to cut even further to successfully ride out the hard economic times following the financial crisis. Based in established research, Amabile and Kramer point out that downsizing might not make the companies better off. For two reasons:

First, downsizing often leads to worse, not better, financial performance for firms […]

Second, downsizing can dramatically — and negatively — alter the work environment in the organization, diminishing the motivation and performance of remaining employees.

While these points are well taken, the more fundamental issue in business, as well as behind both these reasons, is mysteriously unnoticed. Granted, the article is about the psychological (negative) effects of downsizing rather than the phenomenon of downsizing per se. But it serves to illustrate a rather common oversight that is of more general interest to readers of this blog: the role of entrepreneurs and entrepreneurship within organizations.

COMETS

The Kauffman Foundation has released the inaugural version of its COMETS database (Connecting Outcome Measures in Entrepreneurship Technology and
Science).

Version 1.0 contains parsed, cleaned, integrated, and beta-tested data from U.S. Patents granted and NSF and NIH grants with a unique ID assigned to the same organization wherever it appears in any record in COMETS.

Over the next several years, COMETS builders Lynne G. Zucker, Michael R. Darby, and their UCLA-NBER research team plan to release successive COMETS versions extending the integrated database to include all published U.S. patent applications, SBIR and STTR grants, U.S. research universities (IPEDS/HEGIS), and U.S. dissertations. Zucker and Darby are also working to include scientist IDs similar to the organization ID and a compiled table of all organizations appearing in any of the legacy databases spanned by or used in construction of COMETS including type (firm, university, research institute, etc.), first and last appearance dates, preferred (most frequent) and variant names, locations with alternative geo-codes, and (for public firms) ticker and CUSIP symbols. The organization data files will serve not only as a sampling frame but also will directly enable a wide variety of studies of private and public high-technology firms and other organizations in the national innovation system. Zucker and Darby have shown that first appearance dates serve as a good proxy for entry dates into new technologies both for start-ups and pre-existing firms extending into the technology, enabling analyses of both entry and duration from entry to various success measures. While some data sources apply only to the United States, all observations are included where they are available. Additional details available at http://www.kauffman.org/COMETS/About-COMETS.aspx.

This is an excellent resource for studying what I call “structural” entrepreneurship.

Profits or Products?

James Allworth writes an interesting column at the HBR blog network on how Steve Jobs solved the Christensenian “innovator’s dilemma.” The latter is the conception of the innovator’s pure love for his innovation or product, but the (counter-acting) need to deliver it to the market profitably. Without profits, no product. Allworth plays on the popular notion of the necessity for profits as a burden for people and entrepreneurs alike – and turns it on its head.

Interestingly in the case of Steve Jobs, Apple turned profitable through throwing profit-focused product development out the window and instead focusing on heart. And by heart, I mean the love for great products – the focus on developing products one is passionate about, and doing so profitably is secondary.

While this story may seem to be at odds with the common understanding of market logic and perhaps provide a blow at the popular notion of cut-throat capitalism, I see it differently. While it is true that innovators have a passion for their products, this is generally true for entrepreneurs as well – they have a passion for their creation, whether it is a process, a product, an organization, or an imagined opportunity. And what they strive for is to realize this passion and, if possible, make a fortune while doing so. The inner motivation is key, and the pecuniary reward is nice but not the primary driver.

In fact, it is this view of the entrepreneur as a passionate judgmental creator of imaginative new means-ends frameworks that I place at the core of what is, what drives, and what defines a firm. (See e.g. here , here or here.) In direct contrast to the popular notion, as played on by Allworth, passion is not the antithesis of profit. Rather, only the passionate entrepreneur can make real entrepreneurial profits, which are only within reach for someone who is willing to risk it all for the sake of his or her passion and the imagined opportunity.

There is no such thing as a routine entrepreneur. Entrepreneurship is revolutionary.

The Unreasonable Institute

No, it’s not the McQuinn Center’s new nickname. It’s Daniel Epstein’s social entrepreneurship group. “For the last two summers, he has helped preside over this academy for entrepreneurs who want to solve social problems and make some money, too. . . . The central idea of the Unreasonable Institute is that profit-making businesses can sometimes succeed where their nonprofit counterparts might falter.” Many, many interesting ventures discussed at this year’s event. Check ’em out.

Neal Stephenson on Innovation and Uncertainty

I’m a big fan of cyberpunk / speculative fiction writer Neal Stephenson, particularly his dazzling Cryptonomicon and the remarkable Baroque Cycle trilogy. Here’s a short nonfiction piece on innovation and uncertainty, “Innovation Starvation.” Like Tyler Cowen, Stephenson worries that scientists, engineers, and entrepreneurs are devoting too much time to incremental improvement, rather than the Big Questions (space travel, nuclear fusion, flying cars, etc.). I don’t find this a problem, as incremental innovation is just important — arguably more important — than “big” innovation, typically state funded and isolated from the market test of success and failure. But Stephenson makes a good point that large organizations (and their stakeholders) tend to rely on information management tools designed to reduce uncertainty, not realizing that (Knightian) uncertainty is ubiquitous, steering them away from genuine novelty that can’t be assessed with the standard quantitative tools:

The illusion of eliminating uncertainty from corporate decision-making is not merely a question of management style or personal preference. In the legal environment that has developed around publicly traded corporations, managers are strongly discouraged from shouldering any risks that they know about — or, in the opinion of some future jury, should have known about — even if they have a hunch that the gamble might pay off in the long run. There is no such thing as “long run” in industries driven by the next quarterly report. The possibility of some innovation making money is just that—a mere possibility that will not have time to materialize before the subpoenas from minority shareholder lawsuits begin to roll in.

Today’s belief in ineluctable certainty is the true innovation-killer of our age. In this environment, the best an audacious manager can do is to develop small improvements to existing systems — climbing the hill, as it were, toward a local maximum, trimming fat, eking out the occasional tiny innovation — like city planners painting bicycle lanes on the streets as a gesture toward solving our energy problems. Any strategy that involves crossing a valley — accepting short-term losses to reach a higher hill in the distance — will soon be brought to a halt by the demands of a system that celebrates short-term gains and tolerates stagnation, but condemns anything else as failure. In short, a world where big stuff can never get done.

More (Almost) Live Blogging

Day 2 afternoon was McQuinn time. I presented the third keynote, “Managing Derived Judgment: Information, Incentives, and Bias.” Building on earlier work distinguishing original and derived judgment and applying the judgment framework to nonmarket decision making, I discussed some problems of providing appropriate incentive structures for delegates — employees, bureaucrats, borrowers — to engage in entrepreneur-like behavior within organizations. Besides the usual problems of assigning decision rights and providing effective monitoring schemes, I noted that subordinates exercising derived judgment on behalf of resource owners often suffer from asymmetric gains a losses, a well-known application of prospect theory. When you rent a car, the best that can happen for you is that you return it in decent shape. If you wreck the car, then (depending on your insurance coverage), you could be liable for substantial damages. The goal is to avoid loss, not take any risky actions that could increase the value of the car. Likewise, elected officials rarely benefit from taking actions that improve public well-being, but they may suffer substantial losses if something bad happens on their watch. Most politicians practice loss aversion, not some version of expected utility maximization. I discussed some means of encouraging productive entrepreneur-like behavior by delegates in the face of potential loss aversion — carefully balancing gains and losses, deemphasizing the status quo, minimizing the stigma of failure, and so on.

The final session featured our own Per Bylund presenting his paper on the division of labor and the emergence of the firm. Echoing Stigler (1951), Per developed a theoretical model of how firms are created by entrepreneurs to create and exploit a more intense division of labor. Discussant (and conference co-organizer) Nicolai Foss noted similarities between Per’s ideas and earlier work by Demsetz, Richardson, Leijonhufvud, and others, agreeing with Per that this aspect of production has been neglected in both neoclassical and transaction cost theories of the firm.

Live-blogging from the conference, day 2

The morning of the second and final day of the conference at Copenhagen Business School started with a keynote by Shaker Zahra (University of Minnesota), who talked about the lack of research on opportunity exploitation. In fact, most research attempts to define, identify, and analyze opportunity discovery or recognition, but fails to take the analysis one step further: from idea, imagination, vision to action. Obviously, what matters to organizations in real life is not simply the discovery of an opportunity (though Kirznerians might disagree) but (successfully) acting to exploit it. The exploitation is also the only thing we can see empirically in the data ex post.

As argued by Shaker, the exploitation of opportunities is (or should be) the core of strategic entrepreneurship. Firms need to act on discovered (or imagined, to use McQuinnian terminology) opportunities so that their resource combinations can be reconfigured in order to exploit the opportunity. Only through exploiting opportunities can a firm be profitable and establish and sustain their competitive advantage.

Following Shaker, O&M blogger Nicolai Foss presented a paper on the role of external knowledge sources in discovery exploitation and the role of organizational design to support this process.  The paper, as discussant Nils Stieglitz noted, opens up the black box of opportunity exploitation; doing so through analyzing organizational design from a knowledge source perspective is an interesting contribution. The problem here, of course, is a potential survivor bias in that the organizational design of unsuccessful firms is not part of the sample (and how could it be?).

So far, a very interesting morning. And it seems most of yesterday’s audience successfully made it out of bed early to indulge in some of the wisdom Shaker Zahra shared in the first session.

Live-blogging from the conference II

Almost half-way through the conference, it is obvious that strategic entrepreneurship (SE)  is a very interesting field of study and that it has great potential. One also feels compelled to conclude that Ireland’s expanded model of SE should be well taken: a great variety of topics have so far been covered from a distinctly SE point of view, and they all contribute greatly to our understanding of the firm, entrepreneurship, and strategy – and introduce new and exciting perspectives.

Interestingly, the papers so far have contributed greatly through adopting an “inter-subdisciplinary” approach, combining strong points from different subdisciplines and approached issues from a “combined” perspective. Many have mentioned the configuration and/or reconfiguration of resources that takes place within the firm, and added an entrepreneurial perspective to this process. But while one might expect primarily conceptual papers on this, most presentations so far have been of empirical studies and the authors have shown quite a bit of entrepreneurial ingenuity in applying existing techniques on existing data in pioneering ways.

The first day, therefore, has been extraordinarily interesting and educational. But, of course, we expect tomorrow to be even better: Peter Klein’s keynote address directly after lunch, with the titel “Managing Derived Judgment: Information, Incentives, and Biases,” should be interesting. And, of course, my own paper on thinking the firm primarily as an “island” of specialization in the very last session.

Live-blogging from the conference I

We’re currently about 25% into the conference and have enjoyed the presentations of two great papers (see the program) and a keynote by R. Duane Ireland. The keynote covered a model (or framework; one of the questions raised during the discussion) of Strategic Entrepreneurship that is much broader than the previously used definition. According to Ireland, strategic entrepreneurship is multi-level and a product of both a firm’s environmental context and its resource orchestration or internal production. The multi-level nature of strategic entrepreneurship suggests that the phenomena studied are on both the individual, organizational, and societal level. Also, it spans both inputs (resources, factors) and outputs (value and wealth creation) as well as the intermediate “black box” of the firm consisting of the acquiring, bundling, and leveraging of resources.

Strategic entrepreneurship thereby takes a broader approach and attempts to both introduce entrepreneurship into strategy, while opening the black box of the firm. The issue was raised, however, whether this is a valuable approach or if it simply a relabeling of already known concepts used in e.g. RBV. A possible answer is that strategic entrepreneurship can explain value to a greater extent on multiple levels in a way that the RBV cannot.

Another question that I intend to find an answer to tonight, is whether and, if so, to what extent market structure is considered in this model for strategic entrepreneurship. It may be problematic while studying the firm that we focus so intently on what is inside the firm and how firms create value that we miss the context. Obviously, to some extent the context is represented in the Irelandian model of SE, but the interdependence of input-output combinations – i.e., the necessity of markets for both inputs and outputs for firms innovating new products – is not. How does that affect our understanding of how firms can and do create value?

More to follow…

Strategic Entrepreneurship Conference Starts Today!

The SMG-McQuinn conference, “Multi- and Micro-Level Issues in Strategic Entrepreneurship,” starts today. The program is here. Some reflections on last year’s conference are here. Per or I will post some commentary soon.