Brazilian Entrepreneurship Reality: A Trilogy of Imitation, Invention and Innovation 89 and outside the company; and (vii) he understands that as part of his work to convince other people to bare a new and good idea to be implemented (Simantob &Lippi, 2003) The innovation profile of an enterprise shows that up to 30% of its billing comes from products or services launched less than five years. The result of a stimuli for innovation can be seen as a learning aspect (the produced knowledge is stored and shared with the other areas of the enterprise); as content (a new good, service or product); as value (financial and economic profits thru innovation); as behaviour (incorporation of capacities that changes the forms to act and to think of the people); and as entrepreneurial spirit (incentive for innovation projects without raising a concern for immediate success) (Simantob & Lippi, 2003). Thus, it cannot automatically be attributed to the entrepreneur the practice of innovation, since many entrepreneurs launch their business in the market with some products already in use or, a lot of times, with some ideas identical to unedited management models, as a practice of entrepreneurship and wealth creation. The habit of copying success models is a common practice in Brazilian companies, considering the data on the initial amount of royalties and licenses of US$ 200 million paid in 1992, passed to US$ 3,5 billion in 2001 (Simantob & Lippi, 2003). Drucker (1985), positioning himself as a partisan of the attribute of innovation to the entrepreneur, agrees with the importance of the imitation process of the entrepreneur, meaning that the entrepreneur can make or do something that somebody else has already made. However, the author considers that such imitation process is, in fact, innovative when applied to his development strategy because the entrepreneur understands better what the imitation represents and what can be aggregated from it. 5. Imitations as an entrepreneurship action It is not possible to necessarily insert to entrepreneurship the practice of innovation, once many entrepreneurs come to the market with similar ideas, or many time these ideas are identical to the inedited model; this way, they do not only undertake action but they also create wealth, despite of not innovating. The habit of copying successful models is a practice in Brazilian companies. This fact can be demonstrated just facing the amount of royalties and licenses paid: US$ 200 million in 1992 and US$ 3.5 billion in 2001 (Simantob & Lippi, 2003). Drucker (2002), still considering innovation as an attribute to entrepreneurship, recognizes entrepreneur’s imitation as a deliberate strategy. He believes that aggregating the entrepreneur with an innovative profile gives attributes to the same person and constitute the best combination for economical growth. It allies inherent disposition to start new enterprise thru innovations, creating openings in the consuming market fore new demands. Paiva Jr. & Cordeiro, 2002 defines the entrepreneur as a person who starts a business or a person who operates or develops it. To him still, the entrepreneur is a person who destroys the existing economic order for the insertion of new products or services in the market, to the creation of new management patterns, or to exploring new resources, substances, and technologies. Imitation becomes a convenient heuristic resource when there is too much information to be processed. Imitation is not a despicable resource; for example, it is fundamental to learning
90 Entrepreneurship – Creativity and Innovative Business Models processes, it promotes social cohesion, and it is a natural mechanism to breath in and breath out. Besides, it may also be a rational economical option (Bonabeau, 2004). In a research held in 100 of 500 companies that a major growth in the United States in 1989, it was pointed that 71% of entrepreneur’s ideas were modifications of ideas identified in their former working environment, and only 4% of theses managers discovered new opportunities through a systematic research (Bhide, 1994). Innovation is an effort to produce an intentional change, focused in the economical or social potential of entrepreneurship (DRUCKER, 1985). Innovation consists in creating and profitably using new technologies, new products, new services, new systems, and new operation forms (Pinchot & Pellman, 2000). It does constitute a central matter for businesses expecting to become more competitive, desiring to develop new knowledge based management strategies about cooperation/alliance for technology products (Dorion et al., 2008). The Organization for Economic Co-operation and Development (OECD) (Becker & Cunha, 2006) makes a difference between technological innovation and innovative activity. The first means new products and processes inserted in the market or a significant improvement in these same products or processes. The second refers to policies and organizational practices focused on research actions and development (they refer to creative and systematic work that aims to increase the knowledge stock); industrial engineering (acquiring or changing equipment, tools, quality control, methods and patterns, with the objective of manufacturing a new product or adopting a new process); production (changes in product and process); marketing of new products (launching these products into the market, their adaptation and commercialization); acquisition of intangible technology (patent office, licenses, know-how, and services of technological content, as well as acquiring equipment and machines of technological characteristic related to innovations started by the company); and drawing activities (definition of proceedings, technical and operational specifications, for the production of a new product or for the adoption of a new process, and artistic drawing activities related to the new product or process. According to Moreira & Queiroz (2007), the most recent studies define technological innovation as introducing in the market a product (a good or a service) technologically new or substantially improved, or as introducing in the company a productive process technologically improved or new. Technological innovation may result from new technological development, from new combinations of the existing technology, or from the use of other knowledge acquired by the company. 6. Do Brazilian entrepreneurs imitate or innovate? Historical factors of the Brazilian industrialization process have contributed to the dominant perception among national companies and businessmen of treating technology as something finished and ready to be applied. This “alienation” ended up in developing a feeling of suspicion related to technological development that has prejudiced the companies and excluded them from world tendency of taking part in international networks of strategic alliances. The protectionist character of the Brazilian industrialization model in substituting importations has de-motivated national sectors that would be beneficiated in being part of technological competition with potential international opponents, once they had a domestic market of great proportions.
Brazilian Entrepreneurship Reality: A Trilogy of Imitation, Invention and Innovation 91 There are some indexes on the importance of technological innovation on economical growth and business competitiveness (IBGE, 2003): a. Technological innovation has been responsible for about 70% of economical growth, and perhaps for 80% to 90% of productiveness gain; b. Private taxes of return on investments in R&D are around 20% and 30%, while social taxes of these same investments are over 50%. On the other hand, investments are slow in Brazil. In 1994, Brazil invested 0.7% of its GNP in science and technology; from this sum, 75% are still supported by the government (Guedes & Bermúdez, 2006). What blocks creativity, according to Filion (2001), is: a. The belief that there always is a correct answer to a certain problem; b. The fallacy that the resolution for any problem must be logical; c. The practical sense limits creativity; d. Breaking up rules, beliefs or paradigms is innovation in many cases; e. Observing only one perspective for the problem; f. Not seeing a connection between mistake and innovation; g. Think of solutions only on the activities of a certain sector of the company; h. Non-conventional thought criticized by the colleagues; i. To be a person who believes to be without any talent or creative intelligence. To Simantob & Lippi (2003), inhibitor factors for innovation are critics and punishment. Thus, there is a block for the capacity to dare, to risk. The innovator, as well as the entrepreneur, needs to be tolerant with unsuccessful ideas. The companies themselves define their innovative profile. They can see 30% of their income comes from products or services launched less than five years ago (Simantob & Lippi, 2003). A Mintzberg & Quinn (1992) state that in innovative configuration is the environment what precedes? An innovative environment, according to Simantob & Lippi (2003), is composed of qualified and continuously trained people, clear and transparent communication, without any filter, a good environment for exchanging information, for daring, and for collective recognition. In Table 3 below, it is possible to analyze the nine dimensions of innovative environment proposed by Simantob & Lippi (2003): Once there are these necessary characteristics so that companies may have an innovative environment, in Brazil it seems that challenges are even greater. A research carried out by IBGE/CEMPRE (SEBRAE, 2006), surveyed that the number of micro companies in the country, between 1996 and 2002, has increased from 2,956,749 to 4,605,607. The accumulated growth of 55.8% passed to a participation in the total number of companies from 93.2%, in 1996, to 93.6%, in 2002. The total number of people occupied in micro companies has gone from 6,878,964 to 9,967,201. With a growth of 44.9% in this period, it increased its participation in total occupation in companies from 31.8% to 36.2%. The number of companies with activities for the same period has increased from 181,115 to 274,009, a growth of 51.3%. The total of people increased from 4,054,635 to 5,789,875, with a growth of 42.8%, showing an evolution from 18.8% to 21.0%. According to this research, micro and small companies corresponded, in 2002, for 99.2% of the total number of formal companies, 57.2% of total jobs, and 26.0% of salary mass. Because of the expressive increase of the
92 Entrepreneurship – Creativity and Innovative Business Models number of jobs generated in in both segments, salary mass presented a real improvement of 57.3% in micro companies and of 37.9% in small companies. Data from this research demonstrates that there are in Brazil a great number of entrepreneurs and they have a major participation in the economical activity of the country. Challenge and They come out when people make what let them happy. The natural involvement consequence is a strong complicity to the activity. Freedom It conquers autonomy to execute and develop ideas and projects. Time to create There is a greater and greater demand for time in the agenda and physical environment proper to have ideas. Support to There is not so much one can do without resources, support or create patronage from leaderships, either for investing in uncertain experiment or to recognize a group merit. Conflict Sometimes, organizations stimulate good competition. As athletes of a same team, people compete among themselves to look for a better result, but respecting team spirit. Debates They are basic ingredient to share ideas and knowledge, respecting opposed points of view. Humor and joy They are more natural in informal environments and with few behavior rules. Trust and They are perhaps the most important stimuli to assure the freedom of sincerity speech and the consciousness that punishment is something to be avoided. Tolerance to risk It expresses clear understanding in accepting mistakes as part of the learning process. Source: Simantob & Lippi (2003) Table 3. Nine dimensions to innovative environment Another research, carried out by the Institute of Economical Applied Research (Ipead), presents, in Table 4 below, that 1.7% of Brazilian industrial companies innovate. Furthermore, the results demonstrate that an innovative company has 16% more chances to be an exporter than the other ones and represents 25.9% of the whole Brazilian industrial income, occupy 13.2% of all jobs generated in the activity, and pay salaries that are 23% higher that the other ones. The effort of these companies to innovate corresponds to 3.06% of expenses with internal R&D; however, as they represent a minority among Brazilian companies, the total spending by industries with R&D falls to 0.7%, while the average of other countries like Germany and France corresponds to 2.7% and 2.5%, respectively (Arbix et al., 2005). It is possible to observe from data presented in both Sebrae and Ipead research that although there are a great number of micro and small companies, there also is a practically insignificant percentage of companies which formally innovate in Brazil. It proves these new companies are merely imitator’s entities of already existing businesses. Other researches indicate a correlation between expenses with innovation and R&D and wealth. While England, the United States, Japan, South Korea, France, and Germany invest
Brazilian Entrepreneurship Reality: A Trilogy of Imitation, Invention and Innovation 93 around 3% of their GNP in science and technology, Brazil invests around 1%. According to a research realized by Human Development Report (UNDP), that established the index of technological development, Brazil, in 2001, occupied the 41st place in the ranking that was headed by Finland, the United States and Sweden. While Brazil has patented 125 technological innovations in 2003, the United States registered 98,663 (Simantob & Lippi, 2003). Competitive strategy Number of companies Participation (%) Profit Employment Innovation and product 1,199 25.9 13.2 difference 1,7% 15,311 62.6 48.7 Specialization in pattern 21.3% products 11.5 38.2 55,495 100 100 Non differentiation for 77.1% product and smaller productiveness 72,005 Total Source: Institute of Economical Applied Research (Arbix et al., 2005) Table 4. Competitive strategy and innovations in companies According to IBGE (2003), 50% of investment in innovations refers to the acquisition of machines and equipment; only 20% are destined to research and development. In Brazil, only 177 companies made some worldwide innovation in 2003. In Table 5 below, it is possible to observe the index of Brazilian innovations throughout time, divided in classes of number of people occupied by them. People occupied with Innovation index Innovation index innovations 1998-2000 (%) 2001-2003 (%) Total 31.5 33.3 From 10 to 29 25.3 30.4 From 30 to 49 33.3 34.2 From 50 to 99 43.0 34.9 From 100 to 249 49.3 43.8 From 250 to 499 56.8 48.0 From 500 on 75.7 72.5 Source: IBGE, PINTEC (2003). Table 5. Indexes of innovation in companies 1998-2000 and 2001-2003 The smaller the company is, the smaller is the index of innovativeness of this same company. It proves once again that Brazilian entrepreneurs do not have an innovative profile, in disagreement with the concept of entrepreneur of most authors mentioned that relate the entrepreneur to a creative and innovative person. In a research carried out by FAPESP agency, despite of the number of innovative companies in Brazil increased from 22,698, in 2000, to 28,036, in 2003, this increase has not reflected in
94 Entrepreneurship – Creativity and Innovative Business Models the creation of new products or new technological processes yet. A study of technological innovation in Brazilian industry, carried out by the National Association of Research, Development and Engineering of Innovative Companies (Anpei) and presented in the 6th Annual Conference of this organization, shows: “The index of innovative products focused on the internal market has fallen drastically, from 4.1% to 2.7% [of the total products in the analyzed period]”, says Roberto Vermulm, professor at Faculty of Economics, Management, and Accounting (FEA) at São Paulo University (USP). According to Vermulm, in Germany or in Italy this index is around 22%. “To be few innovative is still a structural characteristic of Brazilian company”, he stated. Innovative processes focused on the internal market also decreased, from 2.8% in 2000 to 1.2% of total processes in 2003. The Federação das Indústrias do Estado do Rio de Janeiro (FIRJAN) system (2007), using the methodology of Business Week, also presents indexes of innovation for Brazil. It shows that the country dominates important top technologies. That is the case, for example, of petroleum exploration in deep water, aero-spatial technology, and agro-industry. The comparative analysis shows the expense in Brazil with R&D is close to the ones carried out by Russia, India, and China. However, it is worth to point out that it represents only one- third of the amount of investment in South Korea. While analyzing professional formation in Exact Sciences and Engineering, in absolute terms, in the FIRJAN system Brazil has 56,000 graduate professionals, ahead of Singapore (5,600), of Israel (14,000), and of Taiwan (49,000). In relative terms, that is, considering demographic density of these countries, Brazil graduates less capable professionals to work on essential activities to innovation than any other country, except for China. Of the three indexes considered by Business Week, the patent office in the United States is the index of technological development in which Brazil has its worse performance, with an increasing close to the one reached by Russia and quite below the performance of India and China. In absolute terms, in 2003, Brazil was the country with the smallest number of patents in the USA. Even worse, considering the index of evolution in the patent office in the period 1993-2003, Brazil has more registers than Israel only, remembering that Israel has an absolute number of registered patents greater that Brazil does. It is observed that, despite the environment was not favorable to innovation in the last two decades; Brazilian industry could improve and get results in areas with significant investment, such as energy, agriculture and stock growth, and aero-spatial research. 7. Clue on Brazilian business incubation entrepreneurs The process of transformation of an idea into a sustainable company is sufficiently complex. It evolves from the preparation and qualification of the titular of the idea, the planning of this new company and the determination of the choices through the necessary decisions for its continuity up to the articulation of the environment where the company is involved, in order to provide the necessary resources for the implementation of the practice of an imaginative conception. Furthermore, the appearance of an idea from repeated experiences may be reached as long as there is in the incubator a common and continuous effort to understand the nature of lived processes and to identify opportunities to improve these processes (Dorion et al., 2008). According to data, it is favourable to associate intelligence generation from a manager’s of incubator point of view.
Brazilian Entrepreneurship Reality: A Trilogy of Imitation, Invention and Innovation 95 Evaluating the profile of the managers of the incubators, under the optics of the entrepreneurship and innovation, there are great similarities with the managers of the incubated companies, which must facilitate the tuning and the harmony in communication, in the establishment of projects and the flow of discussions. Intra-entrepreneurship constitutes a strong and important characteristic for the managers of incubators. However, by having only one citation referring to this characteristic, this does not mean that the managers do not have it, since, in the elapsing of the interviews, it was asked to the participants to cite entrepreneur’s characteristics and knowing that the answers were open and represented the most noticeable and remembered characteristics from the participants. In respect to the evaluation of the incubated companies and its collaborators, the profile is, in its majority, of technicians, which are constituted of researchers of specific areas that develop studies on ideas for the construction of innovative solutions. The most present citations consisted in the expressions: “to look for new”, “to search other alternatives”, “to create new solutions for old problems”. This indicates the direct link with characteristics related to innovation. This way, the incoming ones to the incubator have innovative characteristics, understanding that business incubators are disseminators of these practices, but will not develop innovative profiles. The characteristics that have been perceived are innovation, search of opportunities, disposal to take risks, creativity, initiative, knowledge of the product, the necessity of achievement and pro-activity. Among the cited characteristics, were observed the attitude of independence, the ability to lead with situations and the capacity of learning, as mentioned by Filion (1992); determination and devotion pointed out as characteristics of the entrepreneur by Dornelas (2003) and the proper business commitment and the adaptability, cited by Timmons & Spinelli (2007). Amongst the entrepreneur’s characteristics, leadership of the actors could not be identified. Also, market knowledge was not in accordance with the behaviour of the participants, since many had only an ideal of a product and perceived thru being incubated the possibility of transforming it into reality, not possessing knowledge, and not having an interaction with the segment that they were to participate in. Moreover, Filion (1992) detaches that the entrepreneurs are involved on a long term basis. From data collection, it was possible to perceive that a vision of the future is mainly linked to the product itself to be developed, showing that there is no indication from the participants of any constructed vision of the future for their business. In some cases, it was demonstrated that the companies were basically a vehicle to create a product, fruit of an idea, or an invention, known in the market; considering the fact that the benefits of entrepreneurship only reinforced the initial idea, but did not enhance the proper action. It is recognized that entrepreneurs are excellent planners; a fact that could not be identified in the research on the profile of the managers of the incubators. To the opposite, it was possible to perceive that the majority of the interviewed, thru their technical profile, did not have any planning established, with a definite plan of actions and when it had, it was the fruit of a business plan, which constitutes a requirement to enter and benefit from the business incubator.
96 Entrepreneurship – Creativity and Innovative Business Models In compensation, the characteristic of innovation of the participants is very high, considering that the sense of urgency to resolve problems with high degree of uncertainty, tolerance to risk and culture of experimentation can easily be identified; but, the profile of the participants does not show relevant characteristics of entrepreneurship, since the designated attitudes as entrepreneur are not necessarily similar to innovation profile. For this reason, the encountering of a profile oriented toward the one of an inventor demonstrate the lack of commitment to create something with economic outputs, understanding that their motivation resides in the creation and in the discovery, nothing more. 8. Conclusion The study of these concepts allows observing that, on one hand, despite possessing an excellent perception in relation to new business opportunities, the Brazilian entrepreneur does not present, in its essence, an innovative character. This can be confirmed by the statistics who point out the fact that smaller is the company, minor is the probability to be innovative, considering the fact that in Brazil, the representation of micro and small companies reaches 99%. It is important to mention that, without having still a consensus between the authors of the area, there is a trend in the literature showing that entrepreneurship is related to innovation, creativity and change. In this perspective and by observing the Brazilian context, it is encountered the existence of an entrepreneur who characterizes himself against such theory based proposal, due to the fact that his link with innovative activities is very weak or inexistent. However, it is possible to perceive in the profile of the Brazilian entrepreneur a high capacity to perceive business opportunities but as imitation of existing enterprises. This can be confirmed, from one hand, by data showing a growth of 50% of the numbers of micro and small companies established in the country between 1996 and 2002 and, on the other hand, by the lecture of an index of only 1.7% of the companies which innovate in its businesses. In this sense, although the imitation may consist as the most common business alternative for Brazilians wishing to create a new venture, an existing entrepreneurial potential in the country would justify a greater investment in innovation within these organizations. This initiative would make possible the creation of new markets and new offers and would minimize the vulnerability of these companies in front of global competitiveness effects. This context enhance the urgent necessity of these companies to invest in research and development for new products and services, which can occur, for example, through the creation of more structured and active R& D activities. Finally, this brief analysis of the entrepreneurial and innovative realities of the Brazilian context shows a lack of presence and use of the entrepreneurial potential and its competitiveness on a national scale. Moreover, the existing concepts in the literature which characterize the entrepreneur as somebody who possesses creativity, is innovative and is an agent for change, mischaracterize the Brazilian entrepreneur, since his act mainly relates to imitation business-oriented, having few characteristics related to innovation. On the other hand, it can be observed that the profile of the managers of the incubators do have entrepreneurship and innovation characteristics, while the profile of the managers of
Brazilian Entrepreneurship Reality: A Trilogy of Imitation, Invention and Innovation 97 the incubated companies only possess innovation characteristics. The evaluation of the profile of the managers indicates a distortion between the theoretical and the practical orientations of the incubation process. This occurs because business incubators do focus on ideas that, many times, are deriving from scientific research or inventions that, if transformed into companies, do result in innovations. As of how innovation can impact on such transition process, the results demonstrate that the managers of the incubators and the director of the incubated companies present a highly innovative profile, but it does not necessarily an entrepreneurial profile. The identification of characteristics, such as the perception of change as a normal phenomenon, the lack of discomfort with new situations, creativity and brainstorming, constitute characteristics which describe the profile of an inventor. But, from the results of this study, they can also demonstrate the ones of a good technician who resolved to commercialize a great idea. Consequently, as of the identification of the profiles of entrepreneurship and innovation, it can be stipulated that business incubators do focus on the development of the missing entrepreneurial and innovation characteristics identified in this analysis; but in very distinct manners. One aspect to be valued from this research refers to qualification, training, management support, posture to interact with the academic sphere; which will generate results and benefits for both the worlds of business and science; because both professors and researchers from the academic world constitute a good source of learning and development for relevant business management practices. Thru such strategy, it would be possible to develop better managerial abilities and entrepreneurial attitude with the managers of the incubated companies. Such action would allow the conciliation of entrepreneurship and innovation characteristics, from the vision of the actors up to their systemic interaction pattern, generating a dynamic disequilibrium, rule of a healthy economy and reality of the economic theory. 9. References Anprotec. (2006). Associação Nacional de Entidades Promotoras de Empreendimentos de Tecnologia Avançada. 19.08.2006 Available from http://www.anprotec.org. br Arbix, G.; Salerno, M. & De Negri, J.A. (2005). Internacionalização com foco na inovação tecnológica e seu impacto sobre as exportações das firmas brasileiras. Revista Dados, Vol. 48(No.1): 395-442. Becker, G.V. & Cunha, N.C.V. (2006). Competências organizacionais: desvendando a inovação em empresas de manufatura. Proceedings of 24th Simpósio de Gestão da Inovação Tecnológica. Associação Nacional de Pós-Graduação e Pesquisa em Administração, Gramado, Brazil, october of 2006, CD ROM. Bhide, A. (1994). How entrepreneurs craft strategies that work. Harvard Business Review on Entrepreneurship. Bonabeau, E. (2004). The perils of the imitation age. Harvard Business Review. Dolabela, F.(1999). Oficina do empreendedor: a metodologia de ensino que ajuda a transformar conhecimento em riqueza. São Paulo: Cultura. Dorion, E.; Pavoni, E.T .& Lazzari, F. (2008). Strategic cooperation for technology products through knowledge-based management learning: a case study on Randon Implements S/A, Caxias do Sul (Brazil). International Journal of Technology Marketing, Vol. 3(No 4): 342-357.
98 Entrepreneurship – Creativity and Innovative Business Models Dornelas, J.C.A. (2003). Empreendedorismo corporativo: como ser empreendedor, inovar e se diferenciar em organizações já estabelecidas. Rio de Janeiro: Elsevier. Drucker, P.F. (1985). Innovation and entrepreneurship. New York: Harper & Row. Drucker P.F. (2002). The discipline of innovation. Harvard Business Review on the innovative enterprise. Harvard Business School Press. Filion, L.J. (1991). Vision et relations : clef du succès de l’ entrepreneur. Montréal Chaire d’ entrepreneurship McLean/Hunter, Montreal, HEC. Filion, L.J. (1992). Bolton twenty years on. The Small Firm in the 1990s. Revue Internationale PME, Vol.5(No.3): 171-189. Filion, L.J. (2001). Compétence métier et vision chez lês dirigeants: réflexions sur le devenir de l’ entrepreneur. Document non publié. Chaire d’ entrepreneurship McLean/Hunter, Montreal, HEC. Firjan (2007). Federação das Indústrias do Estado do Rio de Janeiro. 14.07.2007 Available from http://www.firjan.org. br Gem. (2001). Global Entrepreneurship Monitor: Entrepreneurship in Brazil - 2000: National Report. Curitiba: IBQP. Guedes, M. & Bermúdez, L.A. (2006). Parques tecnológicos e incubadoras de empresas em países em desenvolvimento: lições do Brasil. Brasília: ANPROTEC: SEBRAE. Hisrich, R. D. & Peters, M. P. (2001). Entrepreneurship. 5. New York: McGraw-Hill. Ibge. (2003). Instituto Brasileiro de Geografia e Estatística. As micro e pequenas empresas comerciais e de serviços no Brasil. Rio de Janeiro: IBGE. Mintzberg, H. & Quinn, J.B. (1992). The strategy process. Englewood Cliffs, New Jersey: Prentice Hall. Moreira, D.A. & Queiroz, A.C.S. (2007). Inovação organizacional e tecnológica. São Paulo: Thomson Learning. Paiva Jr., F.G. & Cordeiro, A.T. (2002). Empreendedorismo e espírito empreendedor: uma análise da evolução dos estudos na produção acadêmica brasileira. Proceedings of 26th Encontro Nacional da Associação Nacional de Pós-Graduação e Pesquisa em Administração. Associação Nacional de Pós-Graduação e Pesquisa em Administração. Salvador, Brazil, setember of 2002, CD ROOM. Pinchot, G. (1985). Intrapreneuring: why you don't have to leave the corporation to become an entrepreneur. Harpercollins. Pinchot, G. & Pellman, R. (2000). Intrapreneuring in action: A Handbook for Business Innovation. Berrett-Koehler Publishers. Pirich, A.; Knuckey, S. & Campbell, J. (2001). An interface between entrepreneurship & innovation - New Zealand SME’s perspective. Prepared for DRUID Nelson & Winter Conference 2001. Aalborg University, Denmark. Plonski, G.A. (2005). Bases para um movimento pela inovação tecnológica no Brasil. São Paulo em Perspectiva, Vol. 19(No. 1): 25-33. Schumpeter, J.A. (1934). The theory of economic development. 1 ed. Cambridge: Harvard University Press. Sebrae. (2006). Serviço Brasileiro de apoio às micro e pequenas empresas. 13.08.2006 Available from http://www.sebrae.com.br Simantob, M. & Lippi, R. (2003). Guia valor econômico de inovação nas empresas. São Paulo: Globo. Timmons, J.A. & Spinelli, S. (2007). New venture creation: entrepreneurship for the 21st century. New York: McGraw-Hill, Irwin.
6 New Service Ventures – Struggling for Survival Jörg Freiling University of Bremen Germany 1. Introduction While the tertiary sector of the economy is, in most countries, the dominating one, the entrepreneurial activity of this sector accounts for about 83% of the total entrepreneurial activity (KfW, 2011). Facing this fact little has been said about the peculiarities and challenges new service ventures have to face in general, i.e. beyond the particular issues of certain service industries. This paper intends to fill this gap. It is argued that there are in fact general peculiarities of service ventures that make a difference to other modes of venturing. More, due to the very nature of services, ventures of this realm face particular problems of achieving a state of sustaining establishment in the target market. To address these challenges in more detail, we introduce the ‘liabilities of serviceness’ as another category of liabilities young firms typically face beside the well-known liabilities of newness, adolescence, and smallness (King, 2006). As a consequence, the drop-out rate in many service industries is very high. Accordingly, we consider the struggling for survival of new service ventures an appropriate sub-title of this chapter. To better understand this process and to focus our analysis we raise the guiding question which factors particularly make a difference at the cross-road of survival and failure. Since we do not conduct primary empirical research, we consider it useful to ground our analysis on a sound theoretical framework that frames our analysis. In this connection, particularly approaches from economic theory address issues of failure and survival. As the dominating frame of reference in management studies competence research allows for a solid understanding of the issues relevant to this chapter. Thus, we employ competence- based theory (Teece et al., 1997; Sanchez & Heene, 1996; Freiling et al., 2008) and adapt competence-based reasoning to the service peculiarities by referring to the so-called ‘service- dominant logic’ of Vargo and Lusch (2004). The service-dominant logic (henceforth: SDL) addresses the transition and transformation of value-added processes from a goods orientation to a service orientation. Service orientation does not primarily and exclusively mean the provision of services but rather implies thinking in terms of serving the customer and implementing a value co-production by both the supplier and the customer. The chapter proceeds as follows: In section 2 we portray briefly the very nature of services and the particular situation of service ventures to the end of a first understanding what ‘liabilities of serviceness’ might be about. Subsequently, in section 3 we mirror these liabilities against competence-based theory. To this end, we refer to the open system view of the firm and develop Sanchez and Heene’s (1996) framework to better respond to
100 Entrepreneurship – Creativity and Innovative Business Models peculiarities of service ventures. With this newly developed framework we can specify the challenges in case of service ventures struggling for survival. The chosen causalities are transformed into propositions that may guide future research. In section 4 we portray the managerial conclusions of the debate. The aim is responding to the question what service ventures can do to overcome critical liabilities of venturing and to achieve a state of sustaining establishment in the market. Finally, in section 5 the chapter concludes with a brief outlook. 2. New service ventures, peculiarities of services, and liabilities of serviceness 2.1 On the nature of services What is different in case of services in general and in case of service ventures in particular? Services are different from other goods in numerous ways (Lovelock & Wirtz, 2007; Bruhn & Georgi, 2006; Desmet et al., 2003). Most often, researchers point to the intangible nature of services. Indeed, services are predominantly of intangible nature. However, we need to be careful when contrasting goods and services. Neither it is correct that all goods are purely tangible nor can we say that every service is solely intangible. In case of goods it is mandatory that a tangible core offering is accompanied by services, sometimes as pre-sales services, sometimes as after-sales services, and sometimes as sales-related services. It is simply impossible to market goods without any kind of service provision. Services, instead, can be provided without any tangible add-on. Nevertheless, in most instances this is simply not the case. E.g., in case of business consulting, a typical service with a high level of intangibility, elements of the final result are tangible (final report, documentation, etc.). Insofar, intangibility is an important, but not pervasive feature of services. Against this background we challenge the typical notion of the intangibility of services (Lovelock & Wright, 2002) and specify them in the above mentioned manner. However, in case of intangible solutions customers face a problem to evaluate the quality items. This restricted and sometimes lacking transparency increases the likelihood that customers do not make a purchasing decision simply because of the fact that the transaction-related risk might get out of control. For service ventures, the intangibility of their solutions is thus a first core challenge they have to cope with in their long and uncertain process of getting established in the market. It is worth noting that the (predominant) intangibility is an output peculiarity of services. What else characterizes services? Apart from this output feature there are other criteria that refer to the input or throughput dimension. Serviceness is particularly characterized by the process of service provision (throughput peculiarity). This motivates scholars to stress that services are processes (Bruhn & Georgi, 2006). In this context, services always require the participation of the single customer in the value-added process (Grönroos, 1990; Marion, 1996; Lovelock & Wright, 2002). Sometimes this phenomenon of customer participation is also called ‘customer integration’ (Bruhn & Georgi, 2006). The term indicates that the customer and/or information and/or objects of the customer are integrated in the sphere of the supplier - at least temporarily. Thus, the customer participates via providing information, objects of his own sphere (e.g. machines to be repaired), and/or people. This integration of external factors is mandatory to trigger the final value-added process with the end to supply a customized solution. The simple fact that the customer is directly or indirectly involved in
New Service Ventures – Struggling for Survival 101 the process of service provision reveals the decisive service encounter of the supplier and the customer. Due to the interaction between the two parties, the service encounter is relevant to the customer’s evaluation of the supplier and the solution to be provided. More than that, the encounter itself is relevant to the quality of the service, for customer and supplier agree on the service design and the related specifications. Moreover, they make first steps of co-producing the service - and oftentimes of co-developing a tailored solution (Toffler, 1980; Vargo & Lusch, 2004). Therefore, customer participation is inseparable from the phenomenon of value co-production (Cowell, 1984; Rodie & Schultz, 2000). As for newly founded service companies, customer integration is a challenge. Those firms have neither sufficient customer-related experience available, nor a sound database at hand, nor are they fully aware of the implications of customer participation. Thanks to their newness they often had no chance to build routines of customer integration and hence face problems related to the service encounter. This leads to disadvantaged situations compared to established companies. So far, customer integration is an integral part of the very nature of services. As for the process dimension of services, the debate on the so-called ‘service-dominant logic’ (Vargo & Lusch, 2004) sheds light on another service peculiarity: it is simply not enough to view the value-added process of the supplier the customer is involved in. Oppositely, the customer/supplier interaction does not finish when the solution is provided. Different from that, the supplier is in many instances welcome to support the utilization process of the customer. In order to make the most of the solution provided, customer and supplier continue their joint operations, but now also containing supplier integration in the customer’s sphere. E.g., business consultancies do not leave their clients alone when they provided their solution. Instead, they are usually open for any kind of feedback or requests from their client(s). This supplier integration in case of services is, compared to customer integration, not mandatory but often takes place. The reason for this is that the supplier comes with considerable use-related know-how that may leverage the customer’s benefit considerably. Once again, new service ventures are forced to develop skills of supplier integration that require empathy to better understand what the customer really needs and expects. Next, we analyze service peculiarities before the value-added process starts so that we consider the input dimension as well. In this respect, services are, in fact, very different from other goods. In the moment of the sales-act, services may simply be referred to as non- finished goods. The supplier provides services always after an agreement with the customer on the specifications and terms of trade. Insofar the supplier promises future performance but does not sell something finished ‘right from shelf’. The typical run of events of production followed by the sales-act is inverted. With the agreement, the customer buys a ‘promise’; this promise triggers follow-up value-added processes - independent from the possible situation that the supplier might be prepared for service transactions to some extent. Alchian and Woodward (1988) differentiated in this sense between contracts and exchanges, the first one being relevant to services. Contracts promise future performance. Thus, customers have to believe in the quality of the service and the competence and willingness of the supplier. In case of new service ventures the customer is often unaware of the skills and competences of the supplier due to newness reasons. For new service ventures this may be a serious obstacle of the establishment process since it is very hard to convince customers with an organizational competence that is just developing.
102 Entrepreneurship – Creativity and Innovative Business Models There are many more items of services presented in literature (Lovelock & Wright, 2002; Desmet et al., 2003; Bruhn & Georgi, 2006; Lovelock et al., 2009): variability of inputs and outputs, people as part of the product, perishability, lacking inventories for services, etc. We state that all these items are derived from the one we listed above. Moreover, there are features mentioned in literature (Desmet et al., 2003), that simply do not reflect the service nature. One example is the argument of simultaneity of production, selling, and consumption. As outlined above, the value-added process of services follows the final agreement and thus the contract and the sales-act. Furthermore, using the provided solution might last much longer than production. In this vein, we differentiate between customer integration in the value-added process and supplier integration in the usage process. Thus, services are predominantly (but not necessarily entirely) intangible solutions (output) that rest on mandatory processes of customer integration (with people, information, and/or objects of the customer as external factors to be integrated in the supplier’s sphere at least temporarily). Services are contract goods with an agreement between customer and supplier prior to the final value-added process. These peculiarities challenge newly founded service firms considerable. Most of the problems are connected with quality evaluation by the customer and quality assurance by the supplier. The next sub-section portrays these challenges in more detail. 2.2 Liabilities of service ventures and liabilities of serviceness Population ecology of organizations (Hannan & Freeman, 1977; 1984) tells us that organizational evolution goes along with different problems and challenges depending on the phase of evolution. Older firms face other problems than younger firms. Among the most prominent problems of young firms, entrepreneurship research usually deals with ‘liabilities of newness’, ‘liabilities of adolescence’, and ‘liabilities of smallness’. We briefly tie in this discussion. Our main point, however, is to portray another category of liabilities that we termed ‘liabilities of serviceness’. The latter directly refers to the issues we raised in the preceding sub-section. Hannan and Freeman (1984) point to the particular situation of newly founded firms (liabilities of newness). From the outset, their embeddedness in markets and society is rather low and they are forced to build business relationships fast. Firms with higher levels of reliability have much better chances to survive. The same holds true for other factors such as reputation as well. Young firms are disadvantaged in this respect. This makes them prone to crises. Liabilities of newness occur right from the beginning of the venturing process, so that already in the seed-phase the first problems appear, followed by challenges in the start-up phase. Population ecologists (Hannan & Freeman, 1984) argue that liabilities in later steps of the organizational evolution appear as well. Similar to human life, the liabilities of adolescence refer to the phenomenon that in earlier stages of organizational development processes do not run in the smooth manner that is typical for well-established firms. Instead, due to an under-developed resource endowment, the younger firms face different resource bottlenecks they have to deal with. In financial regards, young firms need to manage stage financings (in particular seed, start-up, expansion, and bridge financing, cf. Volkmann et al., 2010; Freiling, 2006) several times which is in most cases an open and uncertain process. Another issue is coping with barriers to growth. Since growth challenges the given structures, restructuring is necessary every once in a while.
New Service Ventures – Struggling for Survival 103 Whereas the two above-mentioned liabilities directly refer to the age of the firm, the liabilities of smallness focus the problems connected to the size of the organization (Amburgey et al., 1994). These liabilities decrease the likelihood of survival in particular due to the following reasons: limited access to capital markets, limited cost efficiencies and economies of scale, and limited access to high-potentials. The entire resource endowment is limited and bottlenecks are more likely to appear. As for service ventures we can state that all the mentioned liabilities might appear. How far they might affect the organizational evolution of these ventures depends on the situation. In fact, there are service industries and service businesses, where corporate size does not matter or at least is of less interest. Nevertheless, we should not under-estimate these factors and analyze them in connection with the debate on potential ‘liabilities of serviceness’. What are the liabilities of serviceness? We can answer this question by directly referring to the considerations above. A first liability is the problem to demonstrate the quality of the output. Nelson (1970) and Darby and Karni (1973) differentiated three different categories of quality perceptibility of products. Search qualities, as obvious items (e.g. color, material), are easy to assess prior to purchase (ex ante) by simply inspecting a finished good. We learned that due to the contract character of services the solution is not finished, yet, but has to be provided. Search qualities of the solution are thus simply non-existent. Experience qualities are those attributes of a solution that cannot be immediately assessed. The solution has to be used in the utilization process of the customer so that experience-based learning paves the way to customer’s quality evaluation (ex post). Many items that are typical for services belong to this category, such as reliability, fitness for use etc. Many service items are experience qualities so that quality assessments are possible (only after the transaction has taken place) but at the same time require some costs as well. The third category refers to the so-called ‘credence qualities’. Customers are at no time able to assess the quality of these items. If a guru of a religious sect promises eternal life, then we can speak of real credence qualities. Different from the view in literature (e.g. Desmet et al. 2003), there are only a few attributes that belong to this category. In most cases it is possible to assess the quality at least by third-party support (e.g. experts). However, customers do not take this chance due to cost and/or convenience reasons. In those instances, when quality judgment is possible but de facto does not happen, the situation changes. Figure 1 portrays that in those cases we can speak of so-called ‘calculus credence quality’ (Welling, 2006; Sohn & Freiling, 2011). Following Welling’s (2006) train of thoughts, service transactions take place in constellations that can be called ‘Akerlof situations’ (according to Akerlof, 1970). Against this background, services go along with considerable problems of the customer to evaluate the quality of the solution to be provided. Oftentimes, the customer makes use of surrogates that might indicate whether the quality of the solution will conform to requirements or not. In particular, the supplier can be such a surrogate. The customer figures out the skills and motivations, asks for references and testimonial letters to reduce his personal risks. In case of service ventures, this liability of serviceness comes to a serious issue. The supplier is completely new in the market. There is simply no reliable information on the supplier available that can fill the information gap of the customer. Insofar, liabilities of serviceness and liabilities of newness or adolescence form a liaison dangereuse from the supplier’s point of view. The intangibility of the output as well as the contract character of services play a pivotal role in this respect.
104 Entrepreneurship – Creativity and Innovative Business Models Possibility of quality jjuuddggemmeenntt by the customer Before exchange Only after Neither before exchange nor after exchange Before Search quality - - exchange De facto After Calculus Experience - judgement exchange experience quality Credence Neither quality Calculus quality before nor Credence Calculus Quality after Credence eexxchhaannggee Quality Nelson Akerlof Arrow situations situations situations Source: Welling, 2006: 168; Sohn & Freiling, 2011: 13 Fig. 1. Quality Judgment in Case of Services Another liability of serviceness rests on the phenomenon of customer integration. Taken seriously, customer participation in the value-added process implies that the quality of the solution is not solely dependent on the supplier and his operations. Instead, by providing external factors of the customer to be integrated in the value-added process of the supplier (Bruhn & Georgi, 2006), the customer contributes considerably to the quality of the solution. In this respect, quality is a function that depends on the quality of customer’s and supplier’s production factors and operations. Business consultancy illustrates the problem. Following the logic of ‘garbage in, garbage out’ in case of misleading information on the customer’s basic problem, a consultant is simply unable to deliver a solution that fixes the customer’s problem. Service quality is therefore not perfectly manageable by the supplier alone. Consequently, he is forced to manage the entire customer integration process as well. In many cases, this is only possible in case of bilateral adaptations. This liability of serviceness is accompanied and reinforced by the liabilities of newness (no considerable adaptations took place so far) and the liabilities of smallness (absolute lack of inputs and resources). Once again, we have a dilemma in case of service ventures. Service firms can replace lacking control of the quality management process by available routines and capabilities. This, however, is often impossible in case of service ventures. We can conclude that liabilities of serviceness do exist. However, what is more important is the fact that they interact with other liabilities. The oftentimes self-reinforcing effects might threaten the survivability of the new service ventures. Next, we employ theory to better understand the background.
New Service Ventures – Struggling for Survival 105 3. Establishing service ventures in competition - a competence-based perspective 3.1 An open system view on service value-added processes Organizational competences are repeatable, non-random abilities to render competitive output that are based on knowledge and experience and channeled by rules and patterns (Sanchez et al., 1996; Teece et al., 1997; Freiling, 2004; Freiling et al., 2008). Research on organizational competences suggests that the availability and utilization of organizational competences is vital to firm’s competitiveness and survival in competition (Freiling et al. 2008). Insofar, also new service ventures are well-advised to build and leverage organizational competences. Once developed, they stabilize the often under-developed process structures of young service companies. This may lead to more predictable and reliable output. Moreover, existing competences that are perceptible by customers or business partners work as surrogates in the above-mentioned sense. Since services have no search qualities on the product/output level, competences at hand might be a search or experience quality - not of the product but of the supplier. In this respect, customers are able to reduce their transaction-related risk when organizational competences of the supplier are available and evident. More generally, competences are a response to all the liabilities of serviceness mentioned above besides (or in addition to) the liabilities of young and small-sized firms. This is the reason why we employ a theoretical approach that directly addresses the role of competences in competition and the issues of competence building and leveraging. Source: Sanchez & Heene 1996: 41. Fig. 2. The Open System View of the Firm
106 Entrepreneurship – Creativity and Innovative Business Models Within the competence-based theory of the firm we focus our attention on the model of the firm as an open system, following the initial proposal by Sanchez and Heene (1996) which is displayed in figure 2. Sanchez and Heene argue that the firm consists of different system elements that closely interact with each other. Among the system elements, the strategic logic is in a certain way the driving force of all processes. The reason for this is that the strategic logic consists of the decision-making rules and patterns of the entrepreneurs and the other managing workforce that drive the whole value-added architecture of the firm. As such, the strategic logic rests on previously learned knowledge and experience. This logic steers the process of information selection and processing as well as the application of available interpretation schemes. In Sanchez and Heene’s (1996) model the strategic logic permanently interacts with the management processes. In fact, no management process can evolve without an impulse of the strategic logic. Oppositely, every management process will be, to some extent, reflected by the decision-makers. Insofar, we clearly see the link between these two phenomena. For the sake of parsimonious model building and simplification, we question the independent state as two autonomous system elements because they are inseparably linked. In this vein, we model the strategic logic and the related management processes as only one system element henceforth. Subsequently, Sanchez and Heene (1996) model the intangible assets, the tangible assets, the operations, and the product offerings as separate system elements. Once again, we question this variety of system elements in the light of the service peculiarities and make some modifications we explain in more detail below. First, there is no convincing proof why a differentiation between tangible and intangible assets is meaningful and, thus, necessary. Despite some minor differences such as limited imitability of intangibles (Hall, 1991; 1992), there is no reason for fundamental differences. Later on, within the debate on the service-dominant logic (Vargo & Lusch, 2004) we come back to the need of distinguishing between different resource categories. However, at this point of reasoning we simply model the resources at hand without any further differentiation. We follow Sanchez and Heene (1996) insofar as we consider the value-added processes and activities an independent and meaningful system element of service provision. Here, the resources represent the input dimension of services and the value- added processes the throughput dimension. Notwithstanding, facing the service peculiarities we must be careful when considering the output dimension. As outlined above, the output is co-produced. Moreover, services involve in most cases no transfer of property rights to products, although we might think of certain ways to define them. Facing the fact that the customer is deeply involved in developing the solution and considering that thereafter the customer makes use of it, we believe that it is better to assign the performance delivered to the customer - and not to the supplier. The logic that a supplier produces goods to be marketed belongs to the goods-related paradigm. Services are different, as we pointed out above. Consequently we depart from the Sanchez and Heene (1996) model once again - and this time considerably, for we do not only model the supplier but, as shown in figure 3, the customer as well - be it a consumer (b-to-c) or an organization (b-to-b or b-to-a). We do so for reasons we explain in more detail in the follow-up sub-section below. Before, we clarify two more basic principles of the open system view of the firm. First, the role of competences in this system view is still open. One can argue that competences are nothing else but (intangible) resources so that they are already considered within the system element ‘resources’. This would be less than a half-truth. The reason for this is the simple fact that the interplay of the internal system elements is to be managed and mastered.
New Service Ventures – Struggling for Survival 107 Insofar, every firm needs capabilities that translate between the system elements and that ‘keep the wheels on rolling’. A competence thus resides in managing the dynamic interplay between the system elements. This does not exclude that the firm’s competences might reside in other system elements as well. However, the basic ‘top-down’ and ‘bottom-up’ processes in this system rest on capabilities in use. Source: Own Illustration Fig. 3. The Modified Open System View of Service Firms Second, the firm is an open system. The firm, young or old, small or big, is embedded in a business and social environment. To better understand the drivers of survivability in particular of young and small firms, the open system view deals with the external system element called the ‘firm-addressable assets’. When service ventures are challenged by scarce resources and bottlenecks, access to firm-addressable assets mitigates the problems and might keep the organization alive. This reasoning is fully in line with the resource- dependence view with Pfeffer and Salancik (1978) as the main protagonists (cf. Freiling, 2008, for the relationship between resource-dependence theory and the resource-based and competence-based view). Anyway, accessing firm-addressable assets is an endeavor that rests on the availability of capacities as well, since the young firm needs to identify promising assets, find a way to assimilate them, and to integrate them in its own value- added system. The debate on the absorptive capacity (Cohen & Levinthal, 1990) provides us with a basic understanding how this may proceed - with the absorptive capacity as a cumulative capability to access external knowledge.
108 Entrepreneurship – Creativity and Innovative Business Models Figure 3 displays two more links of the firm as an open system to the environment. One is the link to the market, the other the link to external advisors. Firms, in particular new service ventures, are well advised not only to participate in market processes for the sake of sales but to learn in the market. In particular, they need to know how far their value-added architecture is ready to pass the market test. In many cases adaptations are strongly required and major as well as minor changes almost unavoidable. What differentiates service firms from other companies is the fact that market interactions are very much more located on a one-to-one level. This implies that service ventures receive direct feedback from their business relationships to customers, not primarily from anonymous market structures. To this end and different from the Sanchez and Heene (1996) model, there are feedback processes between the customer and supplier related to every system element. The link between the firm and external advisors is decisive as well, particularly from a viewpoint of a new service start-up. The young entrepreneurs typically have a certain sense of direction how to position the company, how to access the market, and how to do the business. These considerations are mirrored in the strategic logic and the management processes as well. The open system view tells us that a strategic logic is usually prone to organizational rigidities. This is not surprising at all for a strategic logic is grounded in basic beliefs and attitudes. Planned change of these phenomena is often impossible. If change happens then the change emerges over a rather long time. These rigidities might threaten the survivability of the young service firm because in unfavorable situations the entrepreneurs might get disoriented and lose their open-mindedness. In those cases it is vital to have access to external advisors they can trust. Insofar, the problem of ‘mental rigidities’ can be circumvented as long as the entrepreneurs are open-minded as well as willing and able to integrate external advice. Finally, we condense our considerations by formulating research propositions that may guide future empirical work on this issue. Against the background of this sub-section and keeping in mind service ventures struggling for survival, we propose: Proposition 1.1. Rigid strategic logics of service ventures decrease the likelihood of survival. Proposition 1.2. Absorbing external advice decreases rigidities of the strategic logic and increases the likelihood of corporate survival. Proposition 2.1. Limited access to firm-addressable assets decreases the likelihood of survival. Proposition 2.2. Absorptive capacities as for all kinds of assets fill critical resource gaps and increase the likelihood of corporate survival. Proposition 3.1. Lacking capabilities of managing the value-added architecture prevent the service ventures from smoothly running operations and hence decrease the likelihood of survival. Proposition 3.2. Permanent competence building and leveraging in the realm of the value- added architecture increase the likelihood of corporate survival. We already addressed learning in the market process. However, within the scope of our next sub-section we can specify the considerations so that the respective propositions are developed below.
New Service Ventures – Struggling for Survival 109 3.2 The survival of service ventures in the light of the service-dominant logic When comparing the original and the modified open system view in the light of service ventures, the most striking difference is that there are two open systems with the customer and the supplier. What is this differentiation good for? The answer can easily be given by pointing to the basic understanding and intent of the service-dominant logic (henceforth: SDL), developed by Vargo and Lusch (2004). SDL departs from the value-added principle of ‘make and sell’ to ‘sense and respond’. Customer and supplier interact, co-develop, and/or co-produce what the customer needs. This requires a mutual openness and often intense bilateral adaptations so that the metaphor of a temporary unit of both parties well fits the basic character of cooperation (Vargo & Lusch, 2004; Lusch & Vargo, 2006). Whereas Vargo and Lusch (2004) suspect that the SDL implies a shift from a single transaction to a long- term business relationship of a customer and a supplier, surrounded by a number of different service transactions, we do not need to go so far. More important is the notion that a temporary collaboration of the close kind develops. This implies a different kind of governance. Whereas in many anonymous markets many suppliers stand vis-à-vis many customers, service markets are personalized to an extent that relational governance replaces market governance. If this holds true, it does not make sense any longer to model markets as the centerpiece of feedback from the other side of the market. Instead, learning in the market is nothing else but learning from a single customer and transferring the insights internally to all system elements of the supplier according to figure 3. A key facilitator of these learning processes is customer integration in the value-added process on the one hand and supplier integration in the utilization process on the other. This viewpoint reveals that it is too myopic focusing only on the value-added process and the related transaction between customer and supplier. The utilization process enhances our view as usage is particularly relevant to a sound understanding of the service nature. Again, we propose: Proposition 4.1. New service ventures with a low intensity of learning from the customer and in the market are more likely to fail. Proposition 4.2. With developed capabilities of both customer integration and supplier integration new service ventures decrease the likelihood of corporate failure. We already raised the question which resources might be of utmost importance to corporate survival. SDL tells us that two different kinds of resources exist, both with completely different roles within the corporate value-added architecture: operant resources and operand resources (Constantin & Lusch, 1994; Vargo & Lusch, 2004). Operant resources are those that act upon other resources to create value. They are deeply embedded in the firm’s resource endowment, enable a smooth run of activities, and are virtually not affected by depreciation. Instead, in most cases their value increases in use. Knowledge, skills, capabilities are prominent examples of this category. Operand resources, however, are those which must be acted on to create value. The typical production factors (materials, energy, machines etc.) belong to this category. Having said this, our next propositions are: Proposition 5.1. Resource gaps decrease the likelihood of the survival of new service ventures. Proposition 5.2. Among the resources, the availability and development of operant resources allow for an increasing likelihood of the survival of new service ventures.
110 Entrepreneurship – Creativity and Innovative Business Models So far, we addressed all the system elements modeled in the modified open system view of new service ventures, some of them directly, others indirectly. The research propositions are intentionally formulated in a more general fashion. It is up to on-going research to specify or modify the propositions in the light of empirical research. Next, we introduce some selected managerial consequences and discuss our findings. 4. Managerial implications and discussion New service ventures find themselves confronted with different liabilities when running a new business. These liabilities are in most cases highly interrelated. The aim of this chapter was to highlight managerial challenges and to locate ways to circumvent the above- mentioned liabilities. To this end, we developed, one by one, propositions as for corporate failure as well as for ways how to cope with these challenges. This section is to translate the theoretically founded findings into a more application-oriented format. The question is: what do entrepreneurs and/or managers in new service ventures have to do to make survival in competition more likely? A first basic insight is that new service ventures need to care for an entire quality management system. We learned that quality challenges appear coevally at the input, throughput, and output level. Moreover, we are aware that not only the supplier produces service quality but the customer as co-developer and/or co-producer as well. This challenge is demanding, for it is not enough to establish a system of company-wide quality control but a system that crosses firm’s boundaries. Facing the liabilities of newness, adolescence, and smallness, new service ventures need to find solutions that save scarce resources while providing a high degree of efficacy. In this dilemma-like situation, new service ventures are not left alone. In fact, there are proven techniques of service quality management that allow for escaping from trade-offs. In this realm, service blueprinting (Shostack, 1984; 1987; Kingman-Brundage et al., 1995) is a technique that supports process management while considering input and output issues as well. The technique was developed for service value- added processes and thus carefully considers all activities connected to customer and supplier integration including all processes in the ‘back-stage’ area of the supplier. Blueprinting is a technique that can be supported by modern software solutions. Practiced in a more informal manner, young and small companies find sound opportunities to employ this method. Practicing techniques, such as service blueprinting, is already a first step into the direction of fostering capability maturity. We know the capability maturity models and systems from other discussions (e.g. quality and reliability of software systems, cf. April & Abran, 2008) and, particularly, from bigger companies longing for professionalizing their activities. In this vein, new service ventures are forced to improve the stability of all operations. To this end, it is useful to develop organizational routines (Pentland & Feldmann, 2008). Mastering a service blueprint already implies the development of routines. People become aware of and familiar with a planned run of events. The more they practice it, the more the routine becomes internalized and hence deeply embedded in the cognitive structures of people. Routines themselves are elements of organizational competences. It is up to service ventures to control this process and to transcend practices from the micro level of the individual to the macro level of the firm. These processes rest to a large extent on organizational learning. Figure 4 describes the process from individual intuition to develop something new, patterns
New Service Ventures – Struggling for Survival 111 or routines included. The model developed by Crossan et al. (1999) indicates how this momentum, created by intuition or, as Freiling and Fichtner (2010) extend, by absorption of external impulses, translates into action sequences beyond the individual by processes of interpretation, integration and, finally, institutionalization in the feed-forward manner. The feedback way of learning allows for refreshing and deepening what was previously learned. From a managerial viewpoint it is up to entrepreneurs and/or managers in service start-ups to keep these feed forward and feedback processes alive that spread between different ontological levels (individual, group, organization). If these processes work, it is most likely that organizational competences develop. organization institutionali- Feed-forward group zation Feedback integration interpretation individual absorp- intui- tion tion Source: Freiling & Fichtner 2010: 161. Fig. 4. The Modified Crossan et al. (1999) Organizational Learning Model Competence-based research suggests that competences are the main reason why firms are able to withstand the competitive pressure. However, having and utilizing competences is not enough, in particular in the service business. When new service ventures find themselves struggling for survival, they need to ensure that available competences can be communicated so that also customers get aware of them. This is by no means an easy endeavor for competences are rather implicit and equipped with a high degree of opacity and causal ambiguity (Dierickx & Cool, 1989). Customers will not get aware of the supplier’s competences easily. Nevertheless, without demonstrating this potential of the supplier to fix problems in a predictable and reliable manner, customers cannot reduce the uncertainty as for a particular supplier. Without a minimum reputation in this regard, service transactions will not take place. Thus, signaling available competences becomes an issue for new service ventures as well. Although this might not be easy at first glance, service start-ups should be aware of the oftentimes hidden chances in this respect. With every process of customer and supplier integration the two parties work together closely. It is useful to take the chances of these ‘moments of truth’ to clarify the competence at hand. In this sense, customer interaction management comes to an issue. 5. Outlook This chapter intends to advance our understanding of service ventures in particular as for the so-called ‘liabilities of serviceness’. We coined this term to pinpoint the challenging situation most of the service ventures are in. What we need to know is how far these liabilities cause higher failure rates of service start-ups or whether service ventures develop
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7 Interfirm Alliances: A Collaborative Entrepreneurship Perspective Mário Franco1 and Heiko Haase2 1University of Beira Interior, NECE – Research Unit in Business Sciences, 2University of Applied Sciences Jena, Center for Innovation and Entrepreneurship, 1Portugal 2Germany 1. Introduction For several years, competing meant reducing costs, as this concept was closely linked to scale economies, and the same strategies were systematically applied. The term of competitiveness was used to characterise firms’ greater or lesser capacity to face the competition. Nowadays, the European Union forces firms to adopt stronger competitive positions, so as to respond to market changes, and to some extent, to be able to survive in their sphere of operation. The continuing need for improvement and constantly increased productivity is an important challenge faced by firms today. For this reason, it can be stated that firms have difficulty in competing individually supported exclusively by its own resources. In fact, at present, and even more so in the future, competitiveness appears in firms’ relationships and networks. Therefore, to compete in a highly complex market, firms must establish cooperations as a business strategy to face difficulties that may emerge. In this context, entrepreneurship appears to be a suitable approach, as it aims at discovering, evaluating and exploiting new business opportunities (Kirzner, 1973; Shane & Venkataraman, 2000; Venkataraman, 1997). This includes activities such as scanning the external environment for new markets, unmet needs, existing problems in work processes and new product ideas (Sandberg, 1991; Sayles & Stewart, 1995). Entrepreneurship is a concept that began to be important at the end of the eighties (Miller & Friesen, 1983; Stevenson & Jarillo, 1990). Since then, a growing amount of literature has helped firms to understand the organisational process that facilitates business behaviour. However, despite all the efforts to study this behaviour and although the business context offers an excellent reference to carry out investigations, entrepreneurship still requires more study in order to establish its legitimacy and specific contribution. Examination of business initiative involves distinction between two types of research: one based on the function of the business-person and the other analysing the business behaviour of existing firms. Older studies focus on the first category, i.e., they focus on the characteristics and behaviour of business-people and analyse the creation of new organisations (e.g. Aldrich, 1990). This paper, however, will come under the second category, i.e., concentrating on business initiative at the corporative level (Stevenson & Jarillo, 1990).
116 Entrepreneurship – Creativity and Innovative Business Models According to this perspective, Miller (1983) set the first cornerstone by introducing the concept of entrepreneurial orientation, characterised by innovation, pro-activeness and risk- taking. Although there is no single term and notion of entrepreneurial orientation, these dimensions were adopted by many subsequent studies (e.g. Lumpkin & Dess, 1996; Kreiser et al., 2002; Tarabishy et al., 2005). In this context, Middel (2008) concluded that entrepreneurial capability is an important requisite for a firm to collaborate effectively with external partners and therefore be able to absorb the beneficial competences of other firms, increasing its level of knowledge and improving its innovative characteristics. According to Antoncic (2007), firms are considered entrepreneurial if they form interfirm relationships and show themselves to be innovative, pro-active and with a capacity for constant self- renewal. As noted by Gundry and Kickul (2007), entrepreneurship tends to require cooperation and collaboration among many parties. In this sense, interfirm alliances can help large and small firms be more entrepreneurial (Ireland et al., 2006; Montoro-Sánchez et al., 2009). In this paper, an interfirm alliance is defined as an organisational arrangement, through which two or more firms acting in isolation manage to overcome their resource constraints. In fact, a growing number of firms rely on alliances to capture the resources they need to achieve their strategic objectives (Bragge et al., 2007; Urbano & Yordanova, 2008). Research shows that interfirm alliances are useful measures to fill resource gaps and to access additional competences (Montoro- Sánchez et al., 2009; Zacharakis, 1998). The concept of cooperation through alliances is found to be particularly involved with the phenomenon of collaborative entrepreneurship. As stated by Yan and Sorenson (2003), the cooperation among firms is one of the dimensions that contribute most to collaborative entrepreneurship. Ribeiro-Soriano and Urbano (2009) characterise collaborative entrepreneurship as a firm’s ability to collaborate outside the organisation. For Miles et al. (2005), collaborative entrepreneurship involves a group of firms that develop a strategy which allows them continuous innovation, through the respective collaborative capacities. This process is developed from alliances between two or more parties, all aiming to reach beneficial results. In this vein, the present paper conceives collaborative entrepreneurship as a strategy involving implementation within the firm, of knowledge and information coming from outside. The synthesis of the relationship between entrepreneurship and interfirm alliances is an interesting and fruitful area of investigation, but hitherto studies have mainly concentrated on small and medium-sized firms (SMEs) (Marino et al., 2002; Zacharakis, 1998), with a shortage of research applied to large firms. To fill this and other voids, in this paper the unit of analysis is the firm, whatever its size, and interfirm alliances. One of the main contributions of this paper is to establish an interface between two important areas of management: entrepreneurship and strategic management. More precisely, the intention is to examine to what extent the formation of interfirm alliances can contribute to the development of collaborative entrepreneurial activities, i.e., how this decision can be interpreted as a form of collaborative entrepreneurship. To date, the role of entrepreneurship in alliance research, or vice versa, has received very limited attention in the literature (Alvarez & Barney, 2005). In particular, the influence of entrepreneurial orientation and firm resources on the decision to enter into alliances is an under-researched field. Consequently, the objective of this conceptual paper is to fill this caveat. In doing so,
Interfirm Alliances: A Collaborative Entrepreneurship Perspective 117 its contribution lies in developing theory and a better understanding of how to use interfirm alliances as an approach to collaborative entrepreneurship. The remainder of this book chapter is organised as follows: Section 2 refers to the main theories on which this paper is grounded, namely, resource-based theory and resource dependence theory. Section 3 discusses some definitions of interfirm alliances and, subsequently, the main reasons leading firms to adopt this business strategy, namely, obtaining and developing new resources. Section 4 offers a depiction of the various types of resources, capacities and competences a firm should possess, and more precisely, presents some typologies of these resources. As entrepreneurial orientation is the keyword to evaluate whether a firm adopts entrepreneurial actions, Section 5 deals with this concept and presents its various dimensions. Section 6 shows how formation of interfirm alliances can be interpreted as a form of collaborative entrepreneurship. The paper concludes with proposing a conceptual model for future analyses and some final considerations. 2. Principal theories Various theories support the formation of alliances between firms, but in this book chapter highlights the two most important of them: Resource-based Theory and Resource Dependence Theory. 2.1 Resource-based Theory According to Barney (2001), the development of Resource-based Theory resulted from frustration with the neo-classical economic justifications for firm performance, particularly neo-classical arguments based on market power such as hom*ogeneity and mobility of a firm’s resources. On the other hand, for Mahoney and Pandian (1992), the origins of Resource-based Theory are found in the field of strategy, in institutional economics (Positive Agency Theory, Theory of Ownership Rights, Theory of Transaction Costs and Evolutionist Theory) and in Industrial Organisation (Chicago School and Harvard School). Corner, quoted by Mahoney & Pandian (1992), places the origins in Neo-classical Theory, Industrial Organisation and Theory of Transaction Costs. They argue persuasively that the resource approach reflects both a strong industrial organisation approach and one which at the same time is unique. However, Resource-based Theory is due to Edith Penrose, in 1959, with her book ‘The Theory of the Growth of the Firm’, where the firm is looked on as a wide set of resources (Buckley & Casson, 2007). Contrasting with neo-classical ideas, Penrose (1959) assumed the heterogeneity and immobility of resources and carried out an analysis of how some firms manage to achieve competitive advantage in a given industry while others do not (Bowen, 2007). In this way, resources were both the key to a firm’s success and the main limitation of their growth (Buckley & Casson, 2007). The vision of Penrose made a useful contribution to good management practice, highlighting the creation of value through creative activity influenced by internal and external stimuli which lead to growth and innovation (Pitelis, 2005). Besides Penrose in 1959, other authors such as Hofer and Schendel (1978), Wernerfelt (1984), Grant (1991) and Peteraf (1993) also contributed to Resource-based Theory.
118 Entrepreneurship – Creativity and Innovative Business Models The objective of Resource-based Theory consists of analysing the position of resources in a firm and looking at some strategic options suggested by that analysis, namely the relationship between profitability and resources and ways of managing the position of resources in the firm over time (Wernerfelt, 1984). A central proposition of this theory is that firms are heterogeneous. Each firm is seen as a unique set of tangible and intangible resources (Esteve-Pérez & Mañez-Castillejo, 2008; Wernerfelt, 1984) and capacities that are acquired, developed and expanded over time. A firm’s resources and capacities are the result of its strategic choices and commitment of resources over time and determine its performance at any time (Esteve-Pérez & Mañez-Castillejo, 2008). Therefore, the unit of analysis of this theory is the firm and that firm’s resources (tangible and intangible) and capacities. A resource is understood to be anything that can be thought of as a strength or weakness of a given firm (Wernerfelt, 1984). A firm’s current resources are defined as those assets which are connected semi-permanently to a firm, such as: brand name, knowledge of technology, use of competent collaborators, commercial contracts, machinery, efficient procedures, capital etc. (Furrer et al., 2008). For Hart (1995), resources include physical and financial assets as well as employees’ competences and organisational (social) processes. A firm’s capacities are the result of the sets of resources acquired for unique activities that create value (Hart, 1995). Penrose (1959) refers to resources using the term of services, and other investigators (Chaston & Mangles, 1997; Hamel et al., 1989; Smart & Conant, 1994) refer to central competences. The firm can give a different direction to resources according to purpose. However, it is fundamental that they are ‘labelled’ to avoid conflict and to define the situations in which they will be used. The term of capacities is used to describe how resources are applied in the firm. Grant (1991) suggests that capacities are what is generated from the result of applying the resources a firm possesses. Wernerfelt (1984) and Barney (1991) suggest that an optimal combination of a firm’s resource profile and its activities in the product market should optimise its performance. It was this theory, therefore, that gave rise to articulation of the relationships between a firm’s resources, capacities and competitive advantage. For Wernerfelt (1984), competitive advantage can be sustained if the capacities that create that advantage are supported by resources that are not easily copied by competitors. In other words, a firm’s resources should raise barriers to imitation in the same line of thought. Bowen (2007) states that analysis of the characteristics of resources emerging in a firm and identification of the current or potential location of competitive advantage may lead to improved economic performance. There seems to be consensus about the characteristics of resources that contribute to a firm’s sustainable competitive advantage (Peteraf, 1993). At the most basic level, those resources must be valuable, irreplaceable and inimitable. For a resource to have effective value, it must contribute to a firm’s capacity having competitive meaning and not being easily accompanied by alternative meanings (Barney, 2001). In the view of Miller and Shamsie (1996), resources should provide profit or avoid possible losses for the firm. The existence of resources that are heterogeneous and difficult to create, substitute or imitate by competing firms allows competitive advantage associated with a high level of performance. It is often questioned whether firms use resources and capacities appropriately, in order to give them competitive advantage. Therefore, Grant (1991) underlines that one of managers’ concerns
Interfirm Alliances: A Collaborative Entrepreneurship Perspective 119 consists of adopting strategies which enable the firm to make effective use of the resources and capacities available. Resources and capacities allow formulation of competitive strategies, this fact being proven in the investigations by Chandler and Hanks (1994) who propose a relationship between resources, capacities and a firm’s performance. Some authors (e.g. Chandler & Hanks, 1994) claim that the sustainability of a firm’s capacities is the key to competitive advantage in the long term. Definition of sustainable capacities includes capacities that are not easily created by the competition, and which serve as a support for the strategic plan. In this connection, Grant (1991) underlines that a firm’s resources and capacities have to be protected in order to ensure greater competitive advantage. As long as a firm has the right resources, it is in a position to identify and explore new growth opportunities that may arise, as the environment is not a conditioning factor in a firm’s evolution. Associated with resources is strategic management focusing on the firm’s internal characteristics and respective performance (Grant, 1991). This approach differs from the classical theory of strategy by focusing fundamentally on resources, and it can also be assumed that some firms are heterogeneous concerning the resources they control (Greene et al., 1997). Combination and/or overlapping of resources allows firms growth and consequently expansion of business activities. However, it is not enough to analyse this theory in isolation in order to explain a firm’s growth and performance, it being fundamental to consider firms together with the environmental context. Small firms cannot exclude their surrounding environment. This fact is due to the great influence exerted by the environment on small firms (Chandler & Hanks, 1994). Resource-based Theory presents some limitations. For Bowen (2007), one limitation of this theory is that it focuses only on analysis of a firm’s internal resources for implementation of its strategy, without taking into account the external institutional pressures which affect firms and the stance they adopt with regard to those pressures. Furrer et al. (2008) argue that Resource-based Theory does not suitably explain the difference in performance between firms that have the same level of uniqueness, rarity, inimitability and isolation of resources. For Barney (2001), this theory should be completed with theories of the entrepreneurial process and creativity for a better understanding of the strategic alternatives a firm can adopt given the resources it controls. It is in that context that this investigation emerges. 2.2 Resource Dependence Theory Resource Dependence Theory is highlighted in studies involving organisational cooperation. This theory reflects the importance of resources as a ‘critical variable’ of the organisation. Resource Dependence Theory covers several variables, such as power, control, uncertainty and trust (Pfeffer & Salancik, 1978). According to some authors (Das et al., 1998; Grandori & Soda, 1995), this theory offers a dimension of qualitative and quantitative dependence in explaining business cooperation phenomena. The respective assumption considers that firms manage to survive by establishing interfirm alliances, allowing them to access indispensable resources (Pfeffer & Salancik, 1978; Zinn et al., 1997). In simple cooperation relationships, there is total inter-dependence between firms, and these alliances are regulated by association agreements so as to face up to competitors’ resources. In the
120 Entrepreneurship – Creativity and Innovative Business Models most complex alliance processes, these are regulated through relational and binding contracts involving the transfer of resources (Grandori & Soda, 1995). The choice of a partner in an alliance depends on the position of the resources in the market, and for that reason, it is important to analyse the environment. If the resources are abundant and their supply is stable, resource dependence is not a problem. However, if resources are scarce, firms need to develop strategies in order to diminish resource dependence and control the environment (Zinn et al., 1997). Reduced resource dependence can be achieved by forming alliances and other forms of collaboration. It is from the environment that scarce resources are obtained and opportunities identified. These resources are obtained through interfirm relationships. Some resources can be developed inside the organisation, but most of them are obtained by sharing when alliances are developed with other firms (Holmlund & Tornroos, 1997). According to Sachwald (1998), forms of cooperation have been widely put into practice in order to lower entry or mobility barriers. With these cooperative agreements, the goal is to gain entry to markets at a low cost, in relation to the necessary resources. That is why Oliver (1997) and Sachwald (1998) consider the phenomenon of business cooperation as one of the main methods for firms to reach resources, competences and capacities that are not available in competitive markets, and also intangible resources (reputation, for example). The value or usefulness of a resource depends on its combination with other resources, as resources in isolation have no value. When resource availability is limited, the formation of alliances can be a strategy that is preferred over other organisational forms (Sachwald, 1998). Nevertheless, in some cases, business alliances do not bring benefits as the advantages brought to the firm are not as great as the costs involved. Resource dependence can be a question of technology, lack of raw material, access to new markets and new competences (Sachwald, 1998). Grant (1991) considers differences between resources and competences. Resources are production method inputs, and so these methods need coordination between resources. Competences are described as the capacities of a set of resources to carry out a task or activity. This author also underlines that resources are the source of capacity, and competences are the source of competitive advantage. So the essential element between a firm’s resources and competences is the capacity to achieve coordination in work teams. Sachwald (1998) also distinguish a firm’s resources from its competences. These authors state that in a firm there may be resources, which are coded knowledge, or competences which are tacit knowledge. As resources are explicit they have a market value, and are easy to control and transmit, but competences are non-expressed (invisible) resources, they cannot be compared and so do not have market value. According to Pucik (1988), competences are tacit knowledge obtained over time, being constructed progressively by firms themselves. Despite the contribution of Resource Dependence Theory, several criticisms of this approach have been expressed in organisational studies. The lack of empirical studies allowing analysis of the combination of resources is one of the criticisms made by Peteraf (1993). Collis (1991) also points out as a criticism the absence of applicability of the theoretical studies made of Resource Dependence Theory in the field of cooperative strategies. The same author emphasises that practical studies are only applied to multinational firms and
Interfirm Alliances: A Collaborative Entrepreneurship Perspective 121 not to small and medium-sized ones. Grant (1991) and Priem and Butler (2001) also criticise this approach for the non-existence of integration of theoretical foundation, and for the limited effort in developing practical implications of this theory. 3. Interfirm alliances 3.1 Characteristics of interfirm alliances Alliances are a phenomenon that firms have adopted to promote technological modernisation, through shared investment, in the search for competitiveness. However, certain doubts often still remain regarding the concept of interfirm alliances, despite their application being increasingly common. Some definitions of this concept are therefore discussed. According to Badaracco (1991), alliances are organisational arrangements and operational policies through which individual firms share an administrative domain and form social relationships. Dussauge and Garrette (1999) underline that alliances are formed by relationships between independent firms that choose to act together in carrying out projects or activities. For Porter (1998), these cooperation phenomena are presented as organisational methods of economic activity using coordination and/or cooperation between firms. According to Lewis (1990), alliances are cooperative strategic arrangements that allow cooperation between firms, aiming to satisfy common needs with the advantage of sharing risks. Wheelen and Hunger (2000) understand alliances as partnerships between two or more firms or business units, with the intention of reaching mutual objectives. Aaker (2000) adds that alliances reinforce the parties involved until the initially established goals are achieved. For this to happen, cooperating firms must adapt their assets or competences so as to face up to attacks from competitors. All alliances are motivated by the need for partners’ resources, in areas where own resources are more critical (Wilson & Hynes, 2008). In essence, these relationships allow partner firms to combine resources creatively in establishing sets of competitive advantage (Teng & Das, 2008). In these alliances, the intention is to stimulate the specialised competences of each firm so that they can join resources, allowing the creation of greater market strength (Bucklin & Sengupta, 1993). Alliances between firms include the sharing of resources with a view to the allies’ general objective and the individual objectives of partner firms. The fundamental reason for forming an alliance between firms is the sharing of material and non-material resources to give firms a stronger competitive position (Chathoth, 2003). The resources obtained through alliances can include location, brand name and client base (Preble, 2000), for example. Firm alliances arise from partnerships between firms which, using their own individual capacities, are unable to create one or more specialised resource internally or acquire it through the market. Therefore, an alliance becomes the vehicle through which partner firms have access to specialised means (Chathoth, 2003). In particular SMEs feel the lack of sufficient resources to develop marketing activities and penetrate the market. So with partners, a great variety of needs are met (Pansiri, 2008). Alliances are forms of voluntary cooperation involving the share of information, mutual learning and exchange between members, as well as social control (Johannisson et al., 2002).
122 Entrepreneurship – Creativity and Innovative Business Models Alliances are considered as a complementary system which facilitates firms’ innovative activity. These partnerships are a source of external knowledge, and so a firm’s competitive advantage depends on its position in the relationship (Lechner et al., 2006). Alliances are one of the most powerful assets a firm can possess, as they give access to power, information, knowledge and capital (Hulsink & Elfring, 2003). The majority of firms do not have the financial resources to allow expansion. Therefore, an alliance becomes fundamental, since the costs of obtaining a partner are less than those of firm expansion outside (Wilson & Hynes, 2008). One of the main advantages of this type of relationship is risk sharing. These alliances are advantageous for firms in the sharing of resources and risks, which is especially important as the uncertainty of their results increases (Chathoth, 2003). Following these various investigations in the field of alliances, the conclusion is that when this type of business relationship is formed, higher rates of productivity, efficiency and effectiveness are reached. In order to overcome limitations that usually affect SMEs in the business process, whether through lack of resources (human and financial) or experience, this type of firm has increasingly adopted cooperation strategies in order to strengthen resources and capacities. Cooperative actions are a way for firms to organise themselves to compete at a local, regional and global level. However, these strategic alliances imply the loss of autonomy, as they require the mutual collaboration of partners. 3.2 Reasons for interfirm alliances formation The motives leading firms to form alliances with others have been the subject of various investigations. The reasons stimulating alliance formation can be diverse, such as: improved competitiveness, risk reduction, the search for scale economies, access to technology, market exploration, the need to develop, response to government threats or pressure, among others. Bamford et al. (2003) restructure the motives for developing strategic alliances according to the following topics: possibility to create new business; easy access to the partner’s capacities when resources are scarce or when risks are high; cost reduction; creation of scale economies; overlapping business; improvement of supplier efficiency through establishing optimal relationships; increased innovation and quality; and value creation. For Lewis (1990), the inter-dependence of firms created by the shortage or absence of resources is a condition for alliance formation. Aaker (2000) also argues that strategic alliances serve as an instrument compensating for the lack of competences and resources. Alliances form a bridge between firms and the competences each party possesses, more efficiently and quickly (Hamel et al., 1989). This exchange of competences and resources allows firms to remain competitive in the market. According to Neto (2000), the main reasons motivating alliance formation are: (a) to combine competences and use other firms’ know-how; (b) divide the burden in carrying out technological research; (c) share the risks and costs of new opportunities; (d) offer an improved and more diversified range of products; (e) exert more pressure on the market; (f) share underused resources; (g) strengthen buying power with suppliers and consumer sales; and (h) strengthen firms so as to operate in international markets.
Interfirm Alliances: A Collaborative Entrepreneurship Perspective 123 The study by Rossi et al. (2009) identified three base-lines supporting justification of alliance formation, only two of which are relevant for this investigation. One of the basic ideas is related to the need to access resources which are absent or in short supply and which can be supplied by the partners in the alliance. The other base-line is centred on the combination of resources in order to gain competitive advantages. Studying Rossi et al. (2009) in more detail, the first base-line justifying alliance formation sets out from the assumption that the firm is not self-sufficient in relation to the resources it needs. This is the motive for forming an alliance, in order to satisfy the shortage or lack of resources. This approach to sustaining alliances is supported by Resource Dependence Theory, stating that firms are engaged in a constant struggle to obtain the resources they need and control that dependence. The second approach of Rossi et al. (2009) supporting the development of alliances identifies that the combination of resources between the firms involved in these relationships allows them to achieve results which would not be possible if acting in isolation. This combination of resources is seen as a source of competitive advantage, this idea being supported by Resource-based Theory. As already exposed, this theory argues that alliances are instruments for combining resources among various firms, with the aim of obtaining new business opportunities. The following Table 1 presents the various motives gathered from analysis of the literature review. Reason Author(s) Complementary Technology Mariti & Smiley (1983) Transfer of Technology, Information Bamford et al. (2003); Harrigan (1985); Mariti & and Capacities Smiley (1983) Marketing Agreements Mariti & Smiley (1983) Scale Economies Bamford et al. (2003); Contractor & Lorange (1988); Harrigan (1985); Mariti & Smiley (1983); Mason (1993) Risk-sharing Bamford et al. (2003); Contractor & Lorange (1988); Harrigan (1985); Mariti & Smiley (1983); Neto (2000) Diminishing Instability/Uncertainty Harrigan (1985) Achieving a New Positioning Harrigan (1985) Exploitation of Synergies Harrigan (1985) Diversity and Evolution in sector of Harrigan (1985) operation Surmount Barriers Contractor & Lorange (1988); Harrigan (1985) Creation of New Business Bamford et al. (2003) Cost Reduction Bamford et al. (2003); Harrigan (1985); Neto (2000) Increased Innovation and Quality Bamford et al. (2003); Mason (1993) Exchange of Resources and Capacities Aaker (2000); Contractor & Lorange (1988); Hamel et al. (1989); Harrigan (1985); Lewis (1990); Neto (2000) Control of Markets Neto (2000) Reduction and Rationalisation Neto (2000) of R&D Expenditure Profit Generation Bamford et al. (2003) Product Differentiation Grant (2002); Neto (2000) Table 1. Reasons for Interfirm Alliance Formation
124 Entrepreneurship – Creativity and Innovative Business Models 4. Resources, capacities and competences Considerable irony exists around the process of alliance formation, as firms must possess some resources to be able to capture more resources (Eisenhardt & Schoonhoven, 1996; Saad et al., 2005). Indeed, according to Penrose (1959), firms tend to possess resources so as to increase their use, for example, technology, the firm’s reputation, brand image and knowledge of marketing. In these circ*mstances, Das & Teng (2000) suggest there are two distinct motives for establishing strategic alliances: one of them involves the need to obtain new resources and the other consists of developing own resources by combining them with those of other firms. A literature review suggests that firms’ resources can be tangible (physical and financial) and intangible (based on knowledge). According to resource-based theory, intangible resources are more specific than tangible ones (Lorente, 2001). Intangible resources determine the method of growth, and as they are specific for the purpose for which they were created, they are difficult to codify and therefore protect against imitations or copies (Nonaka, 1994; Hill & Kim, 1988). More concretely, the classification by Miller and Shamsie (1996), used later by Das and Teng (2000), distinguishes between property-based resources (physical and financial resources) and knowledge-based resources (intangible resources and skills). In fact, a firm is made up of resources and capacities that are managed differently from one firm to another (Nunamaker et al., 2002; Penrose, 1959). Following Penrose (1959), Hofer and Schendel (1978) also proposed six categories of resources: (a) financial resources; (b) technological resources; (c) physical resources; (d) human resources; (e) organisational resources; (f) reputational resources. Other classifications are referred to by other researchers (Grant, 1991; Peteraf, 1993; Wernerfelt, 1984), however, they concern the same type of resources. Amit and Schoemaker (1993) consider resources as a set of specific factors held and controlled by the firm, and subsequently converted into products or services through technological mechanisms, information management systems, systems of incentive and trust between the different social partners. Those resources consist of: commercial know-how (patents and licences); financial or physical assets (buildings, premises and equipment) and human resources. Barney (1995) classifies resources into: human resources – experience, knowledge, value judgments, risk tendency and individual wisdom associated with the firm; physical resources – machinery, equipment and premises; financial resources – debts, profits and shares; and organisational resources – history, relationships, trust, organisational culture (attributes of groups of individuals linked to the firm), formal and informal communication, control systems and reward policies, adding that these must be: valuable; rare; unable to be perfectly imitated and irreplaceable. Other investigators such as Barney (1991) and Froehle and Roth (2007) refer to organisational resources. These authors argue that this type includes a firm´s formal reporting structure, its formal and informal planning, controlling and coordinating systems, as well as informal relations among groups within a firm and between a firm and those in its
Interfirm Alliances: A Collaborative Entrepreneurship Perspective 125 environment. Froehle and Roth (2007) state that organisational resources also comprise the development championing, employee motivation, internal communication, lines of responsibility, managerial support, social networks, reward structure and development of team diversity. These resources reflecting the total sum of managerial decisions and activities are predominantly tacit and difficult to transfer across firms, and hence of questionable value in acquisitions. The skills developed by the firm are also a crucial determinant for its development and growth. According to Penrose (1959,) managers’ experience allows development of internal knowledge, skills and competences. This means that the experiences in earlier entrepreneurial activities and the management and negotiation of alliances in the past may impact on knowledge and future decision taking (Eden & Ackermann 2001; Hasty et al. 2006).These specific capacities mostly include tacit elements. Taking into account the various types of firm resources and capacities, Table 2 presents a typology which serves as the basis for this research. Resources and Capacities Description Author(s) Tangible Physical Resources Financial - Only affect choice of the type of Chatterjee Intangible Technological diversity & Singh (1999) Resources - Difficult to protect against copy or Hill & Kim Commercial imitation (1988) Organisational - More specific than tangible resources, Montoro- for the context in which they were Sánchez Specific Prior alliances created et al. (2009); Capacities experiences - Difficult to codify or make explicit Nonaka (1994) - Determine the choice of method of Experience in firm growth collaborative entrepreneurship - Resources that include a firm’s Froehle & Roth structure, formal reports, formal and (2007) informal planning, system control and coordination, as well as informal relations between groups within a firm and between a firm and those operating in its environment - Experience allows development of Penrose (1959) internal and tacit knowledge of resources, competences, operation and standard organisational procedures - The business-person’s experience in Eden & business activities can have an Ackermann impact on knowledge and future (2001) decision-making Table 2. Typology of Resources and Capacities To conclude, firm success is connected to the important role of resources, as these are considered strategic for the firm when they are indispensible for the conception and implementation of competitive strategies (Barney, 1995). The challenge for a firm is to
126 Entrepreneurship – Creativity and Innovative Business Models identify and implement strategic assets, i.e., resources that are difficult to imitate, scarce, valuable and irreplaceable, specific resources as differentiating factors that allow it to achieve competitive advantage in terms of production and economic value (Amit & Schoemaker, 1993; Barney, 1995) and greater economic profitability over time (Grant, 1991). 5. Entrepreneurial orientation According to various authors (e.g. Fillis & McAuley, 2000; Hills, 1994), the concept of entrepreneurship consists of the process through which it is possible to create value by combining different types of resources, so as to exploit a new opportunity such as entry to new external markets. Other researchers such as Styles and Seymour (2006) refer to entrepreneurship as an individual attitude associated with innovation, which creates value and takes on risk. Entrepreneurs are merely actors who have a talent for exploiting opportunities that are not easily identifiable. In organisations in generally, and in firms in particular, various forms of entrepreneurship can be found. Thereby, the entrepreneurial process is independent of firm size (Antoncic & Hisrich, 2003). Entrepreneurial orientation is the key to understanding whether a firm adopts entrepreneurial actions or not, i.e., it is through the actions of both collaborators and the type of culture established internally in the firm (Covin & Miles, 1999). According to Stevenson and Jarillo (1990), intra-entrepreneurship (entrepreneurial orientation), is a process through which individuals in an organisation follow up opportunities irrespective of the resources they currently control. Brunaker and Kurvinen (2006) relate entrepreneurial orientation to the opportunity for existing organisations to be able to develop the way their business operates. For Thornberry (2003), entrepreneurial orientation involves the creation of something new which did not exist before, and that can be a new business, product, service, delivery system or a new proposal of value to the consumer. That ‘something new’ requires additional resources or alterations to the standard strategic positioning of the firm’s resources. Learning takes place both in creating ‘something new’ and in its implementation, which results in the development of new competences and capacities. Entrepreneurial orientation combines competition inside the organisation with long-term cooperation directed towards winning. Consequently, the development of entrepreneurial orientation can be understood as socially effective and processes supporting all organisational members and their cooperative interaction. Internal entrepreneurial orientation indicates responsibility for all and at the same time allows teams to use their own flexibility and freedom. For Miller and Friesen (1983), entrepreneurial orientation includes innovation, pro- activeness and accepting risks. In their studies, many researchers follow these authors’ basis for investigation, for example, Covin and Slevin (1991), Lumpkin and Dess (1996) and Naman and Slevin (1993). Many consider these three dimensions of entrepreneurship as essential for innovation and new business creation. Innovation as a dimension of entrepreneurial orientation (Antoncic & Hisrich, 2003; Covin & Slevin, 1991; Guth & Ginsberg, 1990; Kenney & Mujtaba, 2007; Lumpkin & Dess, 1996; Miller
Interfirm Alliances: A Collaborative Entrepreneurship Perspective 127 & Friesen, 1983) corresponds to introducing new products and production technologies, and searching for new solutions to marketing and production problems. It is the extent and frequency of product innovation in an organisation and its tendency towards being at the forefront of technology. It is a firm’s tendency to initiate and support new ideas, novelty, experimentation and creative processes which can result in new products, services or technological processes. Also authors such as Miller and Friesen (1983), Covin and Slevin (1991), Lumpkin and Dess (1996), Antoncic and Hisrich (2003) and Kenney and Mujtaba (2007) define pro-activeness as another dimension of entrepreneurial orientation. It is the willingness to differentiate ideas from opportunities through researching and analysing tendencies. This requires the firm to be orientated towards the future. It is the attempt to lead rather than follow the competition, the pioneering nature of the firm’s tendency to compete aggressively and pro-actively against industry rivals. Also the fact of firms taking on risks is considered a dimension of entrepreneurial orientation (Antoncic & Hisrich, 2003; Covin & Slevin, 1991; Kenney & Mujtaba, 2007; Lumpkin & Dess, 1996; Miller & Friesen, 1983). So in a firm with entrepreneurial orientation there is risk-taking in terms of investment decisions and strategic action at stages of uncertainty. There is a clear understanding of the business, financial and professional risks associated with entrepreneurial orientation. In order to understand the phenomenon of collaborative entrepreneurship, the collective business capacity is another important dimension of entrepreneurial orientation. As Miles et al. (2006) show, in the first phase of collaboration, the concept of collective business capacity emerges. Timmons (1994) considers the value of the team inside the firm to be extremely important in the early stages of new undertakings. The fundamental component of collective business capacity involves the whole team’s skill in dealing with opportunities which may arise. Johannisson (2002) highlights that for better understanding of collective entrepreneurial capacity, the whole organisation must be recognised as a collective image. For Reich (1987) and Tiessen (1997), the idea that entrepreneurial actions are developed individually is set aside, as these authors argue that entrepreneurship involves collective actions. Stewart (1989) defines this attitude and collective spirit when there are entrepreneurial teams and all collaborators are involved. This is why a firm that already has a good internal collective capacity is more able to develop entrepreneurial activities (Miles et al., 2006), and consequently shows a greater capacity to form alliances with other firms (Miles et al., 2005). Other authors (e.g., Johannisson, 2002, Kenney & Mujtaba, 2007) see entrepreneurial orientation as a collective phenomenon resulting from collective actions where, in a new undertaking, the entrepreneur is never alone. In the understanding of Eisenhardt and Schoonhoven (1996), the collective image is represented by a connection between team members and decision-making by the whole team. In the case of small firms, the business- person’s attitude with regard to his collaborators is very relevant, as only he can exert influence by creating the conditions that increase the collective spirit, making the firm more entrepreneurial (Exton, 2008; Lounsbury, 1998). Table 3 summarises the dimensions characterising entrepreneurial orientation formerly discussed.
128 Entrepreneurship – Creativity and Innovative Business Models Dimension Definition Author(s) Innovation A firm’s tendency to initiate and Antoncic & Hisrich (2003); Pro-activeness support new ideas, novelty, Covin & Slevin (1991); Acceptance of risks experimentation and creative Guth & Ginsberg (1990); Collective processes that can result in new Kenney & Mujtaba (2007); business capacity products, services or technological Lumpkin & Dess (1996); processes. Miller & Friesen (1983) Organisational decision-making Antoncic & Hisrich (2003); through anticipation and following up Covin & Slevin (1991); new opportunities and participating in Kenney & Mujtaba (2007); emerging markets. Lumpkin & Dess (1996); Miller & Friesen (1983) Risks are accepted in terms of Antoncic & Hisrich (2003); investment decisions and strategic Covin & Slevin (1991); action in face of uncertainty. Lumpkin & Dess (1996); Miller & Friesen (1983) Involves the whole team’s skills in Johannisson (2002); dealing with opportunities which may Middel (2008); arise. Stewart (1989); Timmons (1994) Table 3. Classification of the Dimensions of Entrepreneurial Orientation Authors such as Bragge et al. (2007) argue that for a firm to present continuous innovation, it must establish a combination between, first of all, collective entrepreneurship, and subsequently collaborative entrepreneurship. Therefore, the next section describes the concept of collaborative entrepreneurship, and more precisely, connected to the formation, or not, of interfirm alliances. 6. Alliances as collaborative entrepreneurship Due to the growing emergence of new challenges and so as to establish an entrepreneurial culture at the heart of firms, the adoption of strategic alliances appears as one possible response to these challenges, through reinforcing resources of a diverse nature. In this context, a growing number of firms depend on alliance formation to access the necessary resources to reach their strategic objectives (Bragge et al., 2007; Urbano & Yordanova, 2008). The investigation carried out shows that alliances are used as a way of filling gaps in firms’ resources (Montoro-Sánchez et al., 2009; Zacharakis, 1998). Alliances emerge as means of accessing new resources, with the purpose of creating or entering new business. To explain this process, this paper turns to resource-based theory and resource dependence theory. These theories see the firm as a set of tangible and intangible resources and capacities (Wernerfelt, 1984), which provide competitive advantage (Das & Teng, 2000). The decision to form an alliance is a strategy that allows firms to access resources and competences, and consequently that decision can be seen as a form of collaborative
Interfirm Alliances: A Collaborative Entrepreneurship Perspective 129 entrepreneurship. The concept of collaboration (alliance formation) is particularly involved with the phenomenon of collaborative entrepreneurship, which results in something new through sharing knowledge, information and other resources. As Yan and Sorenson (2003) state, the collaboration process is one of the dimensions that contributes most to collaborative entrepreneurship. For Miles et al. (2005), collaborative entrepreneurship involves a set of firms that develop a strategy which allows them continuous innovation through respective collaborative capacities. This collaborative process is developed from alliances between two or more parties, all aiming to achieve beneficial results. In this paper, the focus will be on collaborative entrepreneurship which can be defined as a strategy involving the implementation inside the firm, of knowledge and information coming from outside the firm. The development of alliances began to be very important in the last decades, as this kind of strategy, when well implemented, allows increased performance and success by the parties involved in reaching their intended goals (Parkhe, 1993). This fact contributed to increased investigation in this area, with studies analysing topics as diverse as investment models, choice of organisational management, network structure and trust-building (Alvarez et al., 2006), among others. As a means of adapting to a competitive environment, application of strategic alliances has been common practice, taking advantage of firms’ underused resources and competences. Therefore, alliances allow integration of fundamental strategic resources and other business, so that increasingly entrepreneurial firms manage to reach their objectives (Alvarez et al., 2006; McEvily & Zaheer, 1999). These firms find it easy to identify and explore opportunities with partners who possess complementary resources and capacities, so having an advantage over those that are not able to do so (Dyer & Singh, 1998; McEvily & Zaheer, 1999). Zacharakis (1998) shows that entrepreneurial firms use strategic alliances as a way of filling gaps in their resources. For these firms to have the capacity to exploit new opportunities, they need to obtain resources beyond those they already possess, and control them, and for that reason they are often subject to greater risk (Teng, 2007). As already mentioned, some investigators (e.g., Das & Teng, 2000) apply resource-based theory to the development of strategic alliances in order to obtain desired resources. This is also underlined by other authors (Ahuja, 2000; Eisenhardt & Schoonhoven, 1996) who state that the absence of strategic resources stimulates development of business cooperation processes. Behind alliances there is the objective of attaining or sharing valuable resources when these cannot be obtained through market exchanges or through fusions or acquisitions. Strategic alliances emerge when firms in vulnerable strategic positions need new resources, or when strong, very well-positioned firms capitalise on their resources to create opportunities for cooperation (Montoro-Sánchez et al., 2009). Other researchers (Eden & Ackermann, 2001; Hasty et al., 2006) give great relevance to business-people’s experience in entrepreneurial activities, and also in establishing strategic alliances, as these aspects can be decisive in decision-making. Firms that show entrepreneurial behaviour have greater profitability and growth than those that do not adopt entrepreneurial systems (Antoncic, 2007). For this scenario to be true, it is
130 Entrepreneurship – Creativity and Innovative Business Models fundamental that managers and all collaborators in a firm modify their attitudes and adopt the characteristics of collaborative entrepreneurship (Wunderer, 2001). However, it is not necessary for all collaborators to have entrepreneurial competences. It is just essential that those individuals are detected so that they can be well orientated, as stated by Kenney and Mujtaba (2007). As to the definition of collaborative entrepreneurship, there is still no consensus. However, for the purpose of this investigation, Pinchot’s definition, quoted by Thornberry (2003),will be adopted, stating that collaborative entrepreneurship aims to implement in the firm entrepreneurial behaviour coming from outside and introduce new habits within the organisation. Collaborative entrepreneurial phenomena are found in the creation of new business within the organisation, accompanied by internal innovative activities and initiatives by internal entrepreneurs (intra-entrepreneurs) in the organisation, or they can also occur through strategic changes (Guth & Ginsberg, 1990). This process allows increased business performance, since new knowledge is received, new competences are created or existing ones are reactivated (Hamel et al., 1989). Constant innovation within organisations can be achieved with the collaboration of all actors, leading to the conclusion that the team concept is important in processes of innovation and entrepreneurship (Jassawalla & Sash*ttall, 1999; Stewart, 1989). Collaborative entrepreneurship is present when a firm’s collaborators embrace opportunities without there being a relationship with frequently used resources (Stevenson & Jarillo, 1990). This form of entrepreneurship involves increased competences and the respective hypothesis of creating new sets of resources (Burgelman, 1984). Internal entrepreneurial behaviour is present in the organisation when there is innovation in terms of something which did not exist previously, which may lead to establishing a new business, service or product. During the creation and execution of these new aspects, new capacities and competences emerge. These new acquisitions need extra resources or modifications in the strategic positions of the organisation’s resources (Thornberry, 2003). Finally, according to Kuratko and Goldsby (2004), collaborative entrepreneurship is adopted by various firms so as to remain competitive, allowing growth. For this, the firm’s objectives must include increased flexibility, innovation, collaborator initiative and risk acceptance. Another justification found by the same authors is based on the fact that this form of entrepreneurship allows firms to overcome barriers which may arise. 7. Concluding remarks and model of analysis The present conceptual paper is a contribution to the scientific debate about the interface of entrepreneurship and strategic management. According to the objective and theoretical framework developed, Figure 1 outlines a research model, allowing analysis of the effect of both tangible and intangible resources and capacities on the decision to establish strategic alliances as a form of collaborative entrepreneurship. Of course, the research model is of purely qualitative character. The prescriptive value of the conceptual model lies in supporting entrepreneurs and entrepreneurship scholars to understand the decision to establish interfirm alliances. To date, the several influences on the alliance decision have scarcely been susceptible to scientific scrutiny. Empirical
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