INNOVATING STRATEGY PROCESS

Strategic Management Society Book Series

The Strategic Management Society Book Series is a cooperative effort between theStrategic Management Society and Blackwell Publishing. The purpose of the series isto present information on cutting-edge concepts and topics in strategic managementtheory and practice. The books emphasize building and maintaining bridges betweenstrategic management theory and practice. The work published in these books gener-ates and tests new theories of strategic management. Additionally, work published inthis series demonstrates how to learn, understand, and apply these theories in prac-tice. The content of the series represents the newest critical thinking in the field ofstrategic management. As a result, these books provide valuable knowledge for strate-gic management scholars, consultants, and executives.

Published

Strategic Entrepreneurship: Creating a New MindsetEdited by Michael A. Hitt, R. Duane Ireland, S. Michael Camp, and Donald L. SextonCreating Value: Winners in the New Business EnvironmentEdited by Michael A. Hitt, Raphael Amit, Charles E. Lucier, and Robert D. NixonStrategy Process: Shaping the Contours of the FieldEdited by Bala Chakravarthy, Peter Lorange, Günter Müller-Stewens, and ChristophLechnerThe SMS Blackwell Handbook of Organizational Capabilities: Emergence, Developmentand ChangeEdited by Constance E. HelfatMergers and Acquisitions: Creating Integrative KnowledgeEdited by Amy Pablo and Mansour JavidanStrategy in TransitionRichard A. BettisRestructuring Strategy: New Networks and Industry ChallengesEdited by Karel O. Cool, James E. Henderson, and René AbateInnovating Strategy ProcessEdited by Steven W. Floyd, Johan Roos, Claus D. Jacobs, and Franz W. Kellermanns

Innovating Strategy Process

Edited by

Steven W. Floyd, Johan Roos, Claus D. Jacobs, and Franz W. Kellermanns

© 2005 by Blackwell Publishing Ltdexcept for editorial material and organization © 2005 by Steven W. Floyd, Johan Roos, Claus D. Jacobs, and Franz W. Kellermanns

BLACKWELL PUBLISHING350 Main Street, Malden, MA 02148–5020, USA108 Cowley Road, Oxford OX4 1JF, UK550 Swanston Street, Carlton, Victoria 3053, Australia

The right of Steven W. Floyd, Johan Roos, Claus D. Jacobs, and Franz W. Kellermanns to beidentified as the Authors of the Editorial Material in this Work has been asserted inaccordance with the UK Copyright, Designs, and Patents Act 1988.

All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted, in any form or by any means, electronic, mechanical, photocopying,recording or otherwise, except as permitted by the UK Copyright, Designs, and Patents Act1988, without the prior permission of the publisher.

First published 2005 by Blackwell Publishing Ltd

Library of Congress Cataloging-in-Publication Data

Innovating strategy process / edited by Steven W. Floyd … [et al.].—1st ed.p. cm.—(Strategic Management Society book series)

Includes bibliographical references and index.ISBN 1–4051–2939–5 (hbk : alk. paper)1. Strategic planning. 2. Management. I. Floyd, Steven W., 1950–II. Series.

HD30.28.I538 2005658.4�012—dc22

2004019637

A catalogue record for this title is available from the British Library.

Set in Galliard 10/12 by Newgen Imaging Systems (P) Ltd, Chennai, IndiaPrinted and bound in the United Kingdomby MPG Books, Bodmin, Cornwall

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Contents

List of Contributors viii

Introduction xiiSteven W. Floyd, Johan Roos, Claus D. Jacobs, and Franz W. Kellermanns

Part I The Genesis of Innovative Strategy Making 1

1 Entrepreneurial Orientation as a Source of Innovative 3StrategyGregory Dess, G.T. Lumpkin

2 Entrepreneurship, Organizational Learning, and 10Capability Building: A Governance PerspectiveEric Gedajlovic, Shaker A. Zahra

3 Homesteading on the Endless Frontier: Mapping 17Science to Cultivate InnovationPeter J. Lane

4 The Pre-history of Strategy Processes 23Patrick Regnér

5 Strategy Formation Effects on Managerial Action 33J. Ignacio Canales, Joaquim Vilà

6 Strategy Creation as Serious Play 47Claus Jacobs, Matt Statler

7 Strategy as Art: Using a Creative Action-Based 56Model for Strategy FormulationFrances Fabian, dt ogilvie

Part II Contexts for Innovation and Strategy Making 73

8 Critical Issues in Learning Processes 75Marjorie A. Lyles, Charles Dhanaraj, H. Kevin Steensma

9 Rethinking the Strategy Process: A Co-evolutionary 81ApproachHenk W. Volberda

10 Distributed Agency and Interactive Emergence 88Raghu Garud, Peter Karnøe

11 Making Strategy in the Multi-business Firm 97Sotirios Paroutis, Andrew Pettigrew

12 Explaining the Process of Internationalization by 111Building Bridges among Existing ModelsAlvaro Cuervo-Cazurra, Miguel Ramos

13 Informal Controls at Work: Affecting Behavior Amidst 123UncertaintyJames M. Pappas, Karen E. Flaherty

14 The Role of the Social Context for Strategy Making: 135Examining the Impact of Embeddedness on the Performance of Strategic InitiativesKarolin Marx, Christoph Lechner

15 Strategic Consensus and Constructive Confrontation: 149Unifying Forces in the Resource Accumulation ProcessFranz W. Kellermanns, Steven W. Floyd

Part III Innovative Models of Strategy Process 163

16 What Really is Strategic Process? 165Mark Kriger

17 Micro Strategy and Strategizing: Implications for 176Strategy Process ResearchGerry Johnson, Leif Melin, Richard Whittington

v i C o n t e n t s

18 Strategic Renewal and the Entrepreneurial Mind: 186The Importance of Cognition and LearningAndrew C. Corbett

19 Emotional Attachment and Conflict in Strategic Decision 199Making in New VenturesOtto Koppius, Fedde Germans, Rogier Vos

20 The Search Process and Dimensions of Long-Term 213GrowthGaurab Bhardwaj, John C. Camillus, David A. Hounshell

Part IV Integrating Theory and Practice 227

21 Strengthening our Practices as an Academic Field of 229InquiryAnne Sigismund Huff

22 On the Moral Necessity of Strategy Making 235Bart Victor

23 Reflections on the Field of Strategy 239Taieb Hafsi, Howard Thomas

24 Regaining Relevance Lost 247Bala Chakravarthy

25 I Matter: Remaining the First Person in Strategy Research 252Johan Roos

Index 263

C o n t e n t s v i i

Contributors

Bhardwaj, GaurabBabson College, Babson Park, MA, USAe-mail: gbhardwaj@babson.edu

Camillus, John C.University of Pittsburgh, PA, USAe-mail: camillus@katz.pitt.edu

Canales, J. IgnacioIESE Business School, University of Navarra, Barcelona, Spaine-mail: DOCCanales@iese.edu

Chakravarthy, BalaInstitute for Management Development, Lausanne, Switzerlande-mail: chakravarthy@imd.ch

Corbett, Andrew C.Rensselaer Polytechnic Institute, Pittsburgh, PA, USAe-mail: corbea@rpi.edu

Cuervo-Cazurra, AlvaroUniversity of Minnesota, MN, USAe-mail: acuervo@csom.umn.edu

Dess, GregoryUniversity of Texas at Dallas, TX, USAe-mail: gdess@utdallas.edu

Dhanaraj, CharlesUniversity of Indiana, IN, USAe-mail: dhanaraj@iupui.edu

Fabian, FrancesBelk College of Business Administration, University of North Carolina, Charlotte, USAe-mail: ffabian@email.uncc.edu

Flaherty, Karen E.Oklahoma State University, OK, USAe-mail: pappask@okstate.edu

L i s t o f C o n t r i b u t o r s i x

Floyd, Steven W.University of Connecticut, CT, USAe-mail: steven.floyd@business.uconn.edu

Garud, RaghuNew York University, NY, USAe-mail: rgarud@stern.nyu.edu

Gedajlovic, EricUniversity of Connecticut, CT, USAe-mail: eric.gedajlovic@business.uconn.edu

Germans, FeddeErasmus University Rotterdam, The Netherlandse-mail: f.germans@fbk.eur.nl

Hafsi, TaiebH.E.C. Montreal, Canadae-mail: taieb.hafsi@hec.ca

Hounshell, David A.Carnegie Mellon University, Pittsburgh, PA, USAe-mail: hounshel+@andrew.cmu.edu

Huff, Anne SigismundLondon Business School, UK and University of Colorado, USAe-mail: ahuff@london.edu

Jacobs, Claus D.Imagination Lab Foundation, Lausanne, Switzerlande-mail: claus@imagilab.org

Johnson, GerryUniversity of Strathclyde, Glasgow, UKe-mail: gerry@gsb.strath.ac.uk

Karnøe, PeterCopenhagen Business School, Denmarke-mail: pka.ioa@cbs.dk

Kellermans, Franz W.Mississippi State University, MS, USAe-mail: fkellermanns@cobilan.msstate.edu

Koppius, OttoErasmus University Rotterdam, The Netherlandse-mail: o.koppius@fbk.eur.nl

Kriger, MarkNorwegian School of Management BI, Norwaye-mail: mark.kriger@bi.no

Lane, Peter J.University of New Hampshire, NH, USAe-mail: peter.lane@unh.edu

Lechner, ChristophUniversity of St. Gallen, Switzerlande-mail: christoph.lechner@unisg.ch

Lumpkin, G.T.University of Illinois at Chicago, IL, USAe-mail: tlumpkin@uic.edu

Lyles, Marjorie A.University of Indiana, IN, USAe-mail: mlyles@iupui.edu

Marx, KarolinUniversity of St. Gallen, Switzerlande-mail: karolin.marx@unisg.ch

Melin, LeifJönköping International Business School, Swedene-mail: leif.meli@jibs.hj.se

ogilvie, dtThe State University of New Jersey, NJ, USAe-mail: dt@business.rutgers.edu

Pappas, James M.Oklahoma State University, OK, USAe-mail: pappas@okstate.edu

Paroutis, SotiriosUniversity of Bath, UKe-mail: s.paroutis@bath.ac.uk

Pettigrew, AndrewUniversity of Bath, UKe-mail: a.m.pettigrew@bath.ac.uk

Ramos, MiguelUniversity of Minnesota, MN, USAe-mail: mramos@csom.umn.edu

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Regnér, PatrickStockholm School of Economics, Swedene-mail: patrick.regner@hhs.se

Roos, JohanImagination Lab Foundation, Lausanne, Switzerlande-mail: johan@imagilab.org

Statler, MattImagination Lab Foundation, Lausanne, Switzerlande-mail: matt@imagilab.org

Steensma, H. KevinUniversity of Washington, WA, USAe-mail: steensma@u.washington.edu

Thomas, HowardUniversity of Warwick, UKe-mail: howard.thomas@wbs.ac.uk

Victor, BartVanderbilt University, Nashville, TN, USAe-mail: bart.victor@owen.vanderbilt.edu

Vilà, JoaquimIESE Business School, University of Navarra, Barcelona, Spaine-mail: jvila@iese.edu

Volberda, Henk W.Erasmus University Rotterdam, The Netherlandse-mail: h.volberda@fac.fbk.eur.nl

Vos, RogierErasmus University Rotterdam, The Netherlandse-mail: r.vos@fbk.eur.nl

Whittington, RichardUniversity of Oxford, UKe-mail: richard.whittington@sbs.ox.ac.uk

Zahra, Shaker A.Babson College, Babson Park, MA, USAe-mail: szahra@babson.edu

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I N T R O D U C T I O N

Innovating Strategy Process: An Overview of the Book

The Starting Point

In early August 2002 the board of the Strategic Management Society (SMS)approved Johan Roos and Steve Floyd’s proposal to stage an SMS “mini-conference.”Nine months later in May of 2003, the Strategy Process Interest Group of the SMSorganized a mini-conference entitled Innovating Strategy Processes. Published someone-and-half years after the conference, this book is the outcome of our aspiration tobring some of the learning from that mini-conference to a wider audience.

The mini-conference was co-sponsored by the Strategic Management Society, theSwiss-based Imagination Lab Foundation,1 and the US-based University ofConnecticut. It was held at the university’s campus in Stores, Connecticut. As co-chairs, Steve and Johan chose the intentionally ambiguous phrase “innovating strat-egy processes” to encourage submissions on three closely related themes:

1. connecting strategy development processes to innovative outcomes;2. creating new and innovative ways to develop strategy; and3. exploring innovative research approaches to study strategy process.

The idea was to bring together scholars, consultants, and executives at the leadingedge of strategy process research and practice. Our goals were:

� To identify new conceptual frameworks and models to help strategy processesnurture innovation within firms.

� To reflect on practical experience with strategy processes as they relate toinnovation.

� To experiment with innovative strategy process techniques.

More specifically, the conference was aimed at identifying and revisiting new andexisting theories about the relationship between strategy processes and innovationwithin organizations. Prospective contributors had the opportunity to submit a con-ventional academic paper, a case presentation, or a proposal for a facilitated workshop(see Table I.1).

Scholars, consultants, and managers based in Europe, the United States, Australia,and South East Asia submitted over 80 proposals. Eighteen senior scholars2 served asmembers of the program review panel, selecting the 35 contributions and the 43people who presented at the conference. Selection criteria were:

� the extent to which submissions went beyond what has been previouslyaddressed in the strategy process literature;

� the extent to which they went beyond the logics of research and practice thatdominate our field; and

� the extent to which they promote interaction.

The format of the conference was designed to encourage involvement and participa-tion of all three of the SMS core constituencies: scholars, consultants, and managers.Academic paper presentations were intertwined with case presentations and facilitatedworkshops. During a single day participants could, for instance, engage in a smallgroup dialogue, listen to a formal presentation by a scholar or a manager, as well asexperience hands-on and facilitated strategy tools.

As co-editors we have sought to transfer some of the enthusiasm we experiencedduring the conference to this book. We selected only a few of the most innovativeconference contributions and invited the authors to refine their ideas into book chap-ters. We also invited several more senior scholars in the field who were associated withthe mini-conference to contribute personal and reflective essays. Breaking with tradi-tion, we have abstained from synthesizing these chapters into a coherent whole.Instead, we allow the chapters to speak for themselves. We do offer, however, an out-line of the book and a table summarizing the research papers that appear in the book(see Appendix to this Introduction).

Outline of the Book

As another guide, we have grouped the contributions into four parts. Three of theserepresent distinctions that we made inductively based on the selection of papers fromthe conference. The fourth was conceived after the fact; it serves as a kind of capstonefor what comes before.

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Table I.1 Formats of participants’ contributions

Conference stream Participant contribution Format

New concepts and Research on strategy processes for nurturing Academic papersmodels innovation presentations

Reflections on Single- or multi-firm experience with Case presentationsexperience innovating strategy processes

Experimenting with Facilitation of innovative strategy process Facilitatednew techniques technique or experiential exercise workshops

The first three sections of the book are (see Figure I.1):

� Part I: The Genesis of Innovative Strategy Making� Part II: Contexts for Innovation and Strategy Making� Part III: Innovative Models of Strategy Process

Naturally, grouping the papers and essays is an imperfect process, but the categoriesare logically appealing and fairly accurate as a way of differentiating the work.

In other volumes of this kind, editors often write an integrative chapter that syn-thesizes earlier chapters and points out directions for future research. Instead of this,however, we solicited independent work from three of the most accomplished andreflective people in the field. We felt this would make better use of precious pages andoffer the reader more value. In addition, the book closes with an essay by Johan Roosthat we all feel makes an important statement about why we do the work we do andwhat it means. We hope readers will appreciate this very personal approach to closingthe book. In the next several paragraphs we briefly describe the content of each sec-tion of the book.

Part I: The Genesis of Innovative Strategy Making

Has any scholar ever seen an innovation as it emerged? Normally, innovations areonly identified in retrospect – when they lead to a notorious success story. In this sec-tion of the book, however, three essays and four papers examine where innovativestrategies come from and the initial conditions of strategy making. Gregory Dess andG.T. Lumpkin discuss the links between the entrepreneurial orientation of an organi-zation and the exploration and exploitation activities within in it. They show howenvironmental factors can inhibit or enhance these influences. Continuing entrepre-neurship, but this time in established companies, Eric Gedajlovic and Shaker Zahra

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III

II

I

Innovative Models of Strategy Process

Contexts for Innovation and Strategy Making

The Genesis of Innovative Strategy Making

Figure I.1

argue that one source of strategy lies in the governance systems of organizations.According to these authors, governance systems determine the distribution ofauthority and influence and thereby affect the firms’ entrepreneurial activities andhow established companies learn. Peter Lane’s essay suggests that managers in com-panies of all sizes would do well to examine science as a source of innovative strategy.He argues that firms must better understand the underlying topography of theknowledge frontier and the role that science plays in shaping its fertility.

In the first of the papers in this part, Patrick Regnér explores how diverse factorsand mechanisms contribute to the development of capabilities, strategy, and compet-itive advantage. Juan Ignacio Canales and Joaquim Vilà examine the interactionbetween top and middle management in terms of legitimation and show how strategymaking helps to translate strategy into action. Claus Jacobs and Matt Statler discussthe challenge of strategy creation as the paradox of “intending emergence” anddemonstrate how the concept of serious play can inform the development of a theoryof strategy creation. Similarly concerned with an alternative view on strategy, FrancesFabian and dt ogilvie explore how a fine arts metaphor relates to strategy making as aprocess involving creative, action-based skills.

Part II: Context for Innovation and Strategy Making

The strategy process literature has explored the actors and settings of strategic deci-sion making. However, multiple levels and sites still need to be identified and contin-gencies in these settings need to be made explicit. In the first of three essays, MarjorieLyles, Charles Dhanaraj, and Kevin Steensma reflect on these complexities and arguethat researchers should challenge themselves to address such issues directly. Similarly,Henk Volberda argues that single-theme explanations for strategy processes havereached their limit and that strategy process scholars should adopt research strategiesthat consider joint outcomes of managerial adaptation and environmental selection.His essay offers a conceptual framework for doing so. Raghu Garud and Peter Karnøealso take up the question of context–process interaction. Using three fascinatingcases, they show how a multiplicity of actors, material artifacts, rules, and routinescombine to shape decision making.

Sotirios Paroutis and Andrew Pettigrew look at context as an organization-levelvariable. They describe strategy process in multi-business firms and examine the exe-cution of strategy over time, and show how such firms experiment over time with dif-ferent ways of making strategy. Alvaro Cuervo-Cazurra and Miguel Ramos offer anexplanation of strategy process in an international context. They integrate seeminglycompeting models of internationalization and show that there are underlying com-plementarities among them. James Pappas and Karen Flaherty look at context fromthe inside out by examining the role of boundary-spanning employees in the firm’sstrategy. Their empirical study investigates informal controls as levers of strategicrenewal under conditions of uncertainty.

Karolin Marx and Christoph Lechner focus on the intra-organizational network asa context for strategy making. They argue that the relationship between the extent towhich an initiative is embedded within the network and the success of the initiative iscurvilinear. Continuing with the network as context, Franz Kellermanns and Steven

I n t r o d u c t i o n x v

Floyd integrate insights from the resource-based view, conflict theory, and the strategicconsensus literature. They argue that constructive confrontation among central actorsin the network is necessary for successful resource accumulation and show how thestructure of the network affects this process.

Part III: Innovative Models of Strategic Process

The third part of the book begins with two essays. Mark Kriger’s essay asks: “Whatreally is strategic process?” Sweeping in its scope, he lays bare the diversity ofresponses to this rather basic question. Then, he offers a framework that integrates abroad range of theories on strategic process. Within this extensive body of research,one very basic issue – what strategists actually do – may have been largely ignored.Gerry Johnson, Richard Whittington, and Leif Melin begin their essay with thisobservation and go on to argue that research should begin to focus on the detailedpractices which constitute the day-to-day activities of organizational life and whichrelate to strategic outcomes. Their essay offers a critique of strategy process researchand suggests benefits of the activity- or practice-based view.

In the first of three research papers in this part of the book, Andrew Corbett con-tinues with a rather micro-orientation toward innovative strategy processes. Heargues that strategy is a form of entrepreneurial practice and that variations in indi-vidual cognitive and learning processes affect the development of strategic renewal.Extending the purely cognitive view, Otto Koppius, Fedde Germans, and Rogier Vosinvestigate the affective dimension in strategic decision making. In an interpretativecase study, they explore the role of emotional attachment in a Dutch start-up com-pany. Gaurab Bhardwaj, John Camillus, and David Hounshell also offer a detailedcase study. Their paper provides an interesting account of how strategy making can beseen as a process of a moving, anchored search in the pursuit of long-term growth.

Part IV: Integrating Theory and Practice

The final part of the book is devoted to reflective essays focused on the “big issues”facing innovative strategy process research. In the first of these, Anne Huff worriesabout structural factors in university environments that appear to limit the amount ofstrategy process research being done, and suggests some actions that might increaseour impact on innovation and other important topics. She suggests in particular moremultilevel analysis and further collective work on topics addressed in this volume,including entrepreneurship, motivating action, politics, role conflict, and values.

Bart Victor discusses how we justify the difficult process we call strategy making. Heargues that the principal justification is not cost/benefit in an economic sense. Instead,the effort that leadership devotes to strategy making is morally required. That is, leader-ship has a moral obligation to form strategic intent with care. Failure to do so would betantamount to negligence. His conclusion is that strategy making is unavoidably moral.

“The field of strategy has no future except close to reality,” argue Taieb Hafsi andHoward Thomas in their essay. The strategy researcher’s problem is similar to that ofthe practitioner. While practitioners do not have to justify their decisions intellectually,they must be able to survive the consequences. Also, like the practitioner, the strategy

x v i I n t r o d u c t i o n

researcher muddles in the dark. Hafsi and Thomas conclude that strategy, as a field ofstudy, should be devoted to the development of conceptual frameworks that bringresearch and practice together.

Bala Chakravarthy also focuses his remarks on the issue of making strategy researchmore relevant to practice. Based on several examples, he observes that organizationsneed research that addresses the problems inherent in sustaining performance whilesimultaneously searching for future opportunity. How can academia help firms thatare engaged in continuous self-renewal? Chakravarthy argues that researchers need toconfront the real dilemmas faced by practitioners, but avoid converting these intowhat he calls “phoney debates”.

Finally, in his essay Johan Roos argues that because our field is about humans, andhumans interacting, strategy researchers should remain in the first person, rather thanescaping into the convention of “third person anonymity”. Two anecdotes illustrateJohan’s own struggle to remain outside his work. To support his wish to remain thenarrator, he draws on the Aristotelian ideal of phronesis. For the practice of strategyresearch, phronesis: (i) enhances our self-awareness as scholars; (ii) helps us under-stand more about what is going on; (iii) forces us to take a moral stance; (iv) calls foradditional experiments with methodologies; and (v) changes the discourse in ourfield. Roos also suggests that phronesis may be significant to how managers approachthe practice of strategy.

Overview of paper contributions

This book has something to offer each of the major constituencies of the StrategicManagement Society. For the reflective executive, there are new ideas and rich casedescriptions that are likely to trigger creative thinking about how to design a moreinnovative strategy process. For consultants, there are many new conceptual frame-works for analyzing and designing strategy process – some that integrate and othersthat dis-integrate what has come before. Academic readers especially will relish thediversity and creativity behind the 12 research papers found in this volume. Each isinnovative in the question it addresses, and many are also innovative in their approachor research methodology. Collectively they signal the future direction of the field.Finally, the book offers a series of reflective essays by senior scholars who havethought long and hard about strategy process over most, if not all, of their productivecareers. These insights are likely to prove beneficial to all three SMS constituenciesand to anyone with an interest in the field of strategic management.

Acknowledgements

With respect to the mini-conference, we would like to extend our heartfelt thanks toall of the participants and program review committee members. We would also like tothank Dan Schendel and John McGee for supporting the conference from the begin-ning, and especially Bala Chakravarthy for his wise counsel and committed leadershipto the process. The Strategy Process Interest Group and V.K. Narayanan were alsoinstrumental in co-sponsoring the conference.

I n t r o d u c t i o n x v i i

Melissa Foreman from the Management Department at the University ofConnecticut, Lauren Habegger from Imagination Lab, and Franz Kellermanns pro-vided superb conference support, coordination, and logistics. Without them, none ofwhat you read here would have been possible. Our thanks to the whole team for theirprofessional manner and enthusiastic collaboration.

With respect to this volume, a special thanks to our authors, not only for theirwonderful ideas and contributions but also for their willingness to work within verytight deadlines. We are also grateful to Michael Hitt, Series Editor, for having encour-aged and supported the book. We also express our thanks to Rosemary Nixon,Joanna Pyke, and Tessa Hanford of Blackwell Publishing for their support and superbcollaboration. Last but by no means least, Carla Svehlik and Antoinette Price wereimmensely helpful in the editorial process.

Notes

1. Imagination Lab Foundation in Lausanne, Switzerland, is a research organization devotedto fostering innovative thinking and practices in strategic management (www.imagilab.org).

2. These were: Mary Crossan, Greg Dess, James Frederickson, Raghu Garud, GerryJohnson, Mark Kriger, Peter Lane, Christoph Lechner, Michael Lubatkin, Marjorie Lyles,Andrew Pettigrew, Richard Priem, Patrick Regnér, Nicolaj Siggelkow, Gabriel Szulanski,Henk Volberda, Richard Whittington, and Shaker Zahra.

x v i i i I n t r o d u c t i o n

Appendix: An outline of the bookRegnér Canales and Jacobs and Fabian and Paroutis and Cuervo-Cazurra Pappas Marx and Kellermanns Corbett Koppius, Bhardwaj,

Vilà Statler ogilvie Pettigrew and Ramos and Lechner and Floyd Germans, Camillus,Flaherty and Vos and

Hounshell

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P A R T I

The Genesis ofInnovative StrategyMaking

1 Entrepreneurial Orientation as a Source of Innovative StrategyGregory Dess, G.T. Lumpkin

2 Entrepreneurship, Organizational Learning, and Capability Building: A Governance PerspectiveEric Gedajlovic, Shaker A. Zahra

3 Homesteading on the Endless Frontier: Mapping Science to CultivateInnovationPeter J. Lane

4 The Pre-history of Strategy ProcessesPatrick Regnér

5 Strategy Formation Effects on Managerial ActionJ. Ignacio Canales, Joaquim Vilà

6 Strategy Creation as Serious PlayClaus Jacobs, Matt Statler

7 Strategy as Art: Using a Creative Action-Based Model for Strategy FormulationFrances Fabian, dt ogilvie

C H A P T E R O N E

Entrepreneurial Orientation as aSource of Innovative Strategy

Gregory Dess, G.T. Lumpkin

Innovation is a central activity for firms that want to launch new ventures and renewtheir firm’s strategic efforts (Covin and Miles, 1999; Guth and Ginsberg, 1990).Successful innovation is often complex and requires that firms exhibit multiple talentsand competencies. The concept of exploration and exploitation (March, 1991) capturesthe breadth of activities that firms must be capable of to successfully innovate. That is,firms must be capable of effectively exploring innovation options through activities suchas scanning, experimentation, R&D, and new product development as well as success-fully exploiting new-found possibilities by efficiently deploying resources and organizingwork activities. All this must be done in a context that takes into consideration technol-ogy, competitors, and the business environment surrounding the innovation process.

Firms that exhibit a strong entrepreneurial orientation (EO) may have an advan-tage when it comes to undertaking innovation via exploration and exploitation activ-ities. EO refers to the strategy-making practices and processes that managers engagein to identify and create venture opportunities. EO has five dimensions – autonomy,innovativeness, proactiveness, competitive aggressiveness, and risk taking – whichpermeate the decision-making styles of the firm members (Covin and Slevin, 1991;Lumpkin and Dess, 1996). Many firms that are successful innovators attribute muchof their success to an entrepreneurial orientation (McGrath and MacMillan, 2000).

In this chapter, we will address two issues that help explain how an entrepreneurialorientation may enhance the innovation process. First, we will discuss the linksbetween each of the five dimensions of EO and exploration and exploitation activities.Second, we will address how environmental munificence, complexity, and dynamismcan inhibit or enhance EO as well as exploitation/exploration initiatives.

The Links between EO, Exploration, and Exploitation

In general, we believe that firms with a strong entrepreneurial orientation will pursueinnovation goals more effectively. Prior research has suggested that firms are often

strong in some aspects of EO but exhibit only moderate or low levels of other EOdimensions (Lumpkin and Dess, 2001). In a similar way, different strengths areneeded to pursue the different aims of exploration and exploitation. First, we addressthe extent to which different aspects of EO contribute to the exploration andexploitation process. As a caveat, we recognize that all five dimensions of EO couldbe strongly related to both exploration and exploitation. For example, innovativenesscould involve both the development and introduction of major new products and ser-vices for an organization, as well as relatively minor activities that improve one of theactivities in a firm’s value chain (Porter, 1985). Clearly, the former would focus onexploration while the latter would represent exploitation. However, we will endeavorto develop arguments to support each dimension’s primary relationship to exploita-tion or exploration.

The dimensions of innovativeness and autonomy are well matched to the task ofexploration. Innovativeness refers to a willingness to introduce newness and noveltythrough experimentation and creative processes aimed at developing new productsand services, as well as new processes (Miller and Friesen, 1984). Such activities arenecessary for firms that are exploring opportunities for entrepreneurial development.Autonomy refers to independent action by an individual or team aimed at bringingforth a business concept or vision and carrying it through to completion. Firms thatwish to explore venture opportunities often must create environments where innova-tion team members are free to explore possibilities without the influence of strategicnorms or organizational traditions that may impede the discovery process (Burgelman,1983). Proactiveness, which involves a forward-looking, opportunity-seeking perspec-tive (Miller, 1983), may also contribute to a firm’s exploration efforts. Therefore:

Two other dimensions of entrepreneurial orientation – risk taking and competitiveaggressiveness – are well suited to the task of exploiting innovation opportunities.Firms that effectively pursue new ventures must have a bias for action. That is, theymust make decisions and take steps even in the face of uncertainty and/or competi-tive threats. Risk taking involves making decisions and taking action without certainknowledge of probable outcomes; some undertakings may also involve making sub-stantial resource commitments in the process of venturing forward (Baird andThomas, 1985). Firms that exploit opportunities must be willing to assume financialand business risks in order to be effective. Such activities must be pursued energeti-cally. Competitive aggressiveness requires intense action that is aimed at outperform-ing industry rivals and is characterized by a combative posture and/or an assertiveresponse to threats from competitors who seek to capitalize on similar innovations(Venkatraman, 1989). Proactiveness, which involves acting ahead of competitors inanticipation of changes in demand (Miller, 1983), may also strengthen a firm’s abilityto exploit innovation opportunities. Thus:

Proposition 2: Firms that are high in risk taking, competitive aggressiveness, andproactiveness will more effectively pursue exploitation in the innovation process.

Proposition 1: Firms that are high in innovativeness, autonomy, and proactive-ness will more effectively pursue exploration in the innovation process.

4 G r e g o r y D e s s , G . T . L u m p k i n

The Role of Environment in the Innovation Process

The success of any innovation effort will be affected to some extent by the businessenvironment that surrounds it. When scholars investigate variation in organizationalprocesses and performance outcomes among firms, it becomes important to considerboth the resources available within organizational environments as well as the infor-mation uncertainties facing managers who are trying to navigate within such environ-ments (Castrogiovanni, 2002). Such a perspective incorporates the two approachesthat Aldrich and Mindlin (1978) and others have used to conceptualize organiza-tional environments: (i) as a source of information; and (ii) as a stock of resources.Accordingly, dynamism and complexity indicate the extent of environmental uncer-tainty. Munificence, on the other hand, reflects the degree of resource abundance inthe environment. Dess and Beard (1984) have provided theoretical and empiricalsupport for these dimensions which are also consistent with Child’s (1972) “threeconditions . . . singled out as of particular importance” – environmental illiberality,variability, and complexity. In the sections below, we will discuss the impact of envi-ronment on the effectiveness of innovation efforts.

Environmental dynamism

Environmental dynamism reflects the rate of unpredictable change in a firm’s envi-ronment (Duncan, 1972; Thompson, 1967) with regard to changes in “customertastes, production or service technologies, and the modes of competition in the firm’sprincipal industries” (Miller and Friesen, 1984: 277). Dynamism impairs managers’ability to both predict future events as well as their impact on organizations.

Highly dynamic environments require a strong emphasis on exploration for newopportunities for firms to be innovative, take a proactive stance, and assume risk.Such contexts pose numerous challenges for incumbent firms (Miller and Friesen,1984; Zahra, 1993) and passive behaviors tend to lead to deteriorating performance.This is because the bases for competitive advantages, industry structure, and productperformance standards are short lived or in a constant state of flux (Karagozoglu andBrown, 1988).

Alternatively, at low levels of dynamism (i.e. stable environments), firms do notneed to form and maintain many network linkages nor are they required to developmore complex and exploratory competitive strategies (Aldrich, 1979). In stableenvironments, organizations that develop internal routines and procedures thatbecome standardized through process management activities are likely to do wellbecause the need for innovative and proactive behavior as well as learning require-ments are minimal (Eisenhardt, 1989). Therefore:

Proposition 3: The extent of exploration and exploitation will be affected byenvironmental dynamism:(A) Firms competing in dynamic environments will have a greater level of explo-

ration than firms competing in stable environments; and(B) Firms competing in dynamic environments will have a lower level of exploita-

tion than firms competing in stable environments.

E n t r e p r e n e u r i a l O r i e n t a t i o n 5

Environmental complexity

Child’s (1972) conceptualization of environmental complexity as “the heterogeneityof and range of an organization’s activities” is consistent with others (e.g. Duncan,1972). Thompson (1967) has contended that managers facing more com-plex (i.e. heterogeneous) environments will perceive greater uncertainty andhave greater information-processing requirements than managers facing simpleenvironments.

Firms competing in complex environments must engage in proactive behavior andmonitor many sectors of the environment. Such information-gathering processesinevitably lead to greater differences within management teams with regard to for-mality of structure, interpersonal orientation, and time orientation (Lawrence andLorsch, 1967). Such divergence in perspectives makes consensus in strategy makingmore difficult (Dess and Origer, 1987). Similarly, Khandwalla (1976) found thatmanagers in such environments were more likely to implement multifaceted andcomprehensive strategies. Formulating complex strategies requires enhanced innova-tive and proactive behavior in order to penetrate new product markets and developnew technologies. Firms which have networks characterized by diversity and weak tieswill benefit from requisite variety, non-redundancy, and overall greater access toinformation – helping to ensure successful and novel strategies.

Although increasing levels of environmental complexity would necessitate greaterexploration of new product-market opportunities as opposed to exploitation of exist-ing opportunities, we suggest that a point of diminishing returns eventually comesinto play. We would argue that as environments become increasingly complex, humancognitive limits to rationality become a salient factor (Simon, 1957), despite an orga-nization’s capacity for assimilating new knowledge (Cohen and Levinthal, 1990).That is, satisfying behavior wherein the selection of “acceptable” as opposed to “opti-mal” alternatives take place, thus suppressing innovative initiatives. Organizationsdecentralize structures, monitor many segments of the environment, and must parti-tion the environment within which they choose to compete. Thus, with greater com-plexity, an orientation toward innovation and exploration activity decreases and thereis greater emphasis placed on exploitation of select product markets and technologiesas opposed to further search behavior in newer domains. As opposed to novel,innovative strategies, firms will tend to engage in more intense competitiveaggressiveness to protect existing domains. Thus:

Proposition 4: The extent of exploration and exploitation will be affected byenvironmental complexity:(A) Firms competing in complex environments will have an inverted U-shaped

relationship with exploration. Moderate levels, but not low or high levels, ofcomplexity will be positively associated with exploration.

(B) Firms competing in complex environments will have a U-shaped relationshipwith exploitation. Low or high levels, but not moderate levels, of complexitywill be positively associated with exploration.

6 G r e g o r y D e s s , G . T . L u m p k i n

E n t r e p r e n e u r i a l O r i e n t a t i o n 7

Environmental munificence

Starbuck (1976) and Aldrich (1979) both suggest that environmental munificencereflects the degree to which the environment can support sustained growth; organi-zations engage in proactive and innovative endeavors to seek out environments thatsupport growth and stability. Firms competing in munificent environments haveopportunities to generate slack resources (Cyert and March, 1963), which enablethem to explore new product-market domains and alternate strategies. Slack can alsoserve as a means of conflict resolution and provide additional incentives for experi-mentation as well as “buffer” organizations during periods of scarcity.

In less munificent (or hostile) environments, however, the intensity of competitionexerts strong pressures on a firm to become competitively aggressive in order to exploitpresent markets in order to defend existing positions. Fewer resources are available forengaging in innovative and proactive behavior. Here, there is a greater need for inter-locking organizational arrangements (Pfeffer and Leblebeci, 1973), a greater need for“strategic discipline” (Porter, 1980), and firms are more oriented toward conservinglimited resources (Chakravarthy, 1982). Further, strong network ties and dense net-works become critical in building trust as well as facilitating the efficient transfer ofinformation to implement rather stable, unchanging strategies as firms engage in moreintense competitive behavior. As noted by Miller and Friesen: “Extensive risk taking,forceful proactiveness, and a strong emphasis on novelty can be very hazardous whencompetitive conditions are more taxing” (1983: 223). Therefore:

Conclusion

In this chapter we have briefly addressed two issues: the relationship between the fivedimensions of EO and exploitation/exploration activities and the impact of environ-mental munificence, complexity and dynamism on exploration and exploitation ini-tiatives. Clearly, given space constraints, further theoretical work is called for. Inaddition to strengthening the theoretical arguments that are advanced, researchcould explore, for example, the joint effects of the dimensions of EO on explorationand exploitation initiatives as well as how multiple dimensions of the environmentwould jointly impact exploration and exploitation. Further, hypotheses could addresswhich elements of an industry’s structure have the strongest impact on the efficacy ofEO dimensions and exploitation/exploration activities. Such research would providenew insights on how firms effectively create new ventures and revitalize their capacityfor innovative endeavors.

Proposition 5: The extent of exploration and exploitation will be affected byenvironmental munificence.(A) Firms competing in munificent environments will have a greater level of

exploration than firms competing in hostile environments; and(B) Firms competing in munificent environments will have a lower level of

exploitation than firms competing in hostile environments.