Entrepreneurial Strategy

Lecture 5 - Choose your Technology

Prof. Toke Reichstein

Department of Strategy and Innovation

Copenhagen Business School

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Introduction
Innovation and Firm Size - Schumpeter

• Entrepreneurial innovation - Schumpeter

Mark 1 (TED, 1934)
• Risk-taking entrepreneurs grasp new
opportunities
• Firms swarm into new industries
• Small firms are the key actors - they
introduce radical product innovations
• Managed innovation - Schumpeter Mark 2
(CSD, 1942)
• Innovative activity is increasingly
internalized inside the firm – large in-house
• R&D labs
• Market concentration
• Focus on incremental and process
innovation

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Schumpeterian Hypothesis

• Market concentration (and large firms)

supports innovation
• Monopoly firms have a greater demand for
innovation as their market power will
enhance their ability to gain economic
profits from their innovations
• The monopoly firm will create a large
supply of innovations because ’there are
advantages which, though not strictly
unattainable on the competitive level of
enterprise , are as a matter of fact secured
only on the monopoly level’.

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Galbraith, 1957

A benign providence .. has made the

modern industry of a few large firms
an almost perfect instrument for in-
ducing technical change. There is no
more pleasant fiction than that techni-
cal change is the product of the match-
less ingenuity of the small man forced
by competition to employ his wits to bet-
ter his neighbour. Unhappily it is a fic-
tion. Technical development has long
since been the preserve of the scientist
and the engineer. Most of the cheap and
simple inventions have, to put it bluntly,
been made.

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R&D across firm size

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Innovation across firm size

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Product versus Process

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The Small Firm

• Market concentration (and large firms) supports innovation

• US Small Business Administration: small firms produce 2.4 more innovations
per employee than large firms (Yet problems with data – sample selection,
not all innovations are the same, economic value of innovations by firm size
may differ)
• More patents per pound of R&D (Yet most R&D in small firms is informal and
not measured. R&D statistics underestimate the contribution of small firms
to innovation)
• For process R&D size advantages appear greater than for product R&D (but
very hard to measure)
• Small firms may have high growth rates – but they also have high death rates
• Sectoral variety

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Virtues of Small Firms
Small i Beautiful

1. Distribution of Economics Power

2. High market concentration leads to economic inefficiencies
3. Consumer surplus in maximum
4. Better able to care for individual tastes of consumers
5. Responsible for employment growth
6. Challenge existing order by creating competitive environment
7. Radical innovations are primarily achieved by small firms

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Small versus Large firm I

• We tend to think of large firms to be elephants

• We tend to think of small firms as flexible organizations with virtues larger
firms find difficult to establish
• We tend to think of small firms as different from larger ones when it comes
to innovation performance
• Small firms are often thought as the source of creative destruction
• It does not have to rearrange an existing business platform with established
routines and practices to the same extent

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Small versus Large firm II

• Small firms do not risk cannibalization when launching a new product -

launch those discovered
• They need not battle the internal belief in the technologies that led to
success in the past
• Large firms engages in more complex and large scale projects
• Societies expects larger firms to take on other responsibilities in a grander
scale which small firms cannot wherefore smaller firms are more free to
operate

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Gans and Stern Framework
Entrepreneurship and Technology

• In the context of entrepreneurship, technology is defined as the application

of humanity’s knowledge, tools and crafts to a practical purpose:
• Tool (e.g. computer)
• Technique (e.g. Machine learning algorithm, programming language

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Starting Point and Search

• Starting a firm based on a technological capacity - Search for an unfilled

need
• Start a firm based on a identified need - Search for a technology

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Technology Matter

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Starting Point and Search

The actual outcome value of that technology hinges on how the

founders choose to adopt a technology and potentially innovate upon
it.

To break this down, we argue that not only should technology adoption
not be left to happenstance, founders must start by actively choosing
which technology (or set of technologies) to adopt. To make this decision
they need to weigh the trade-offs between the level of a technology and
its rate of improvement among their technology options.

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Technology Life Cycle

• First introduced by William Abernathy and James Utterback

• Three distinct phases
• The fluid phase
• Experimentation
• Startups bet on developing ”domain design” or building up ”complementary
assets”
• The transitional phase
• Experimentation converge to a standard domain design
• The specific phase
• Process innovation
• Competition based on saving

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Technology S-Curve

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In making a choice of technology, entrepreneurs should:

• Consider the context of all technologies available to them

• Evaluate the trade�off between level and rate of a technology
• Consider how their choice of technology to adopt will cohere with the
choices of competition, customer and identity
• With whom and how they plan to compete
• The interplay between customer and technology
• The implications on the identity of the start�up

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Consider if you Compete or Collaborate

In making a choice of technology, entrepreneurs should:

• Compete with established firms

• Will they be able to establish a competitive advantage with the choice of
technology before incumbents erode it?
• Cooperate with established firms
• Can they integrate into existing systems using this technology without creating
prohibitive frictions for incumbents?
• Remember that the entrepreneur do not necessarily have to pursue a new
technology, entrepreneurs could also apply a mature technology to a new
vertically located business

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Technology Forecast

• Forecast is not guesswork or prediction

• Prediction is concerned with future certainty
• Forecast identifies the full range of possibilities, and maps uncertainty
• A forecast must have a logic to it, and the forecaster must be able to
articulate and defend that logic

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Technology and Psychology
Psychology of consumers’ new-product adoption

• Characteristics of consumers’ response to alternatives

• Evaluation based on subjective perceptions rather than objective value
• Use existing product/service as a reference point
• View improvement as gains and shortcoming as loss
• Exaggerate loss and understate gains – ”loss aversion”

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Cognitive biases lead by loss aversion

• Endowment effect:
• People value products they already have more than those they don’t
• Status quo bias:
• People value more the products they already own for a long time

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Cognitive biases lead by loss aversion

• A mismatch between what entrepreneurs believe what consumers want and

consumers’ true desire
• Entrepreneurs “overvalue” the benefits offered by innovative products, while
• Consumers “overvalue” the benefits they could lose from the existing product

Psychological cost of changing behavior: consumers would only choose the

alternative and change their consuming behavior if the gains far outweigh the
losses

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A dilemma faced by entrepreneurs

• Companies create value through product change;

• But, they capture that value best only if they could minimize behavior change

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Behavior-Product Change

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Implications for the choice of technology

• Entrepreneurs should consider the changes they are demanding of

consumers when making the choice of technology.
• Entrepreneurs who choose a new technology to innovate their
product/service should expect a long left tail before reaching the reflection
point.
• Companies could aim for 10x improvement to overcome consumer’s
overweighting of potential losses.
• Entrepreneurs could also consider whether innovations based on the
selected technology could result in behaviorally compatible products.

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Case and guiding questions
Case: Tesla Motors and their engine choice

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Guiding Questions on Tesla Motors

• What technologies could have been considered by Tesla Motors for

propulsion?
• Think about the pros and cons of a number of technologies available to Tesla
Motors
• Why do you think Tesla Motors choose the rechargeable batteries technology?
• What factors do you use to consider the promise of technology chosen by
Tesla?
• In hindsight, what were the challenges of the Pure Battery propelled vehicles?
• How does the technology contribute to value creation
• How would Tesla access the technology?

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Epilogue
Today’s Lecture

• Small firms have certain virtues in terms of technology and technology assets
• Yet, large firms can reach more widely in terms of project span
• One of the virtues may be realized through decision virtues of the
entrepreneur
• Entrepreneurs make quicker decisions at an equal quality
• Technology choice is essential for getting well on your way
• There are mostly multiple potential technologies for same challenge
• Technology life cycles and levels and rates of change
• Identifying the right indicator of technology development may be tricky and
it tend to differ depending on the technology in question
• The need to understand the challenges given your technology choice
• Window of opportunity

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Thank you

Question or Clarifications?

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Bonus Material: Decision Speed of
Entrepreneurs
Is it important?

• Speed in decision making among management has proven exceedingly

important - not least for the performance and even the viability of firms
• Being quick also allow for proper timing which can be a major competitive
advantage
• For entrepreneurs even more important:
• The windows of opportunity close quickly - the speed in evaluating
entrepreneurial opportunity is core for capturing them
• Even minor threats can have detrimental effects if not acted upon quickly

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But, speed may come at a cost

• Haste make waste .....

• Possibly speed in decision making may lower quality of those decisions and
the solutions they offer to challenges
• Indeed, decision speed is related to closure of firms - possibly lower quality
in decisions

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Entrepreneurs and time

Decision Speed among entrepreneurs

• Are entrepreneurs able to make decisions more quickly of an equal or
better quality given task type?

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Tasks are not just tasks!

• Tasks may come in different shapes and forms:

1. Simple and standardized
2. Complex tasks that requires greater levels of cognitive processing but which
still are clearly defined and bounded
3. Ill-structured tasks in which the individual not only need to engage in deeper
cognitive processing but where the solutions are more open-ended and the
individual also needs to define their own boundaries of solutions.
• Increasingly demanding for the individual as we move from the simple
standardized task to the ill-structured – it takes more time to provide a
solution
• It requires cognitive simplification to solve more complex and ill-structured
tasks

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To study this ...

1. Register time in real time and not as a post rationalization

2. Make the tasks comparable across individuals
3. Have clearly defined boundaries of tasks
4. Be able to assess the quality of the decisions made in terms of offered
solution

Asked individuals to write haiku poems

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Haikus and tasks

• We asked respondents to write haiku poems (5-7-5 syllabi) and evaluate

others haiku poems along
• Evaluation along 6 dimensions following Amabile (1996): 1) creativity, 2)
novelty of word choice, 3) appropriateness of word choice, 4) richness of
imagery, 5) liking, that is how well the evaluator liked the poem overall, and
6) use of the poetic form.
• Provide demographics is a simple task which becomes our benchmark
category

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Examples of poems

Example 1:
They tell us to be
Scared of what we don’t know yet
I follow my fears

Example 2:
Genius is random
Never when you try to be
Always a surprise

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Time measures and groups

• We register time as the respondents answers the survey and solves tasks
• Three tasks are considered:
1. Simple task: Demographics
2. Complex task: Evaluations of peer haiku poems
3. Ill-structured task: Writing a haiku poem
• Two groups considered:
1. Those with entrepreneurial experience - started at least one firm
2. Those without such experience

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Model used

• The study allows us to use seconds spend on tasks

• This allow us to use continuous time duration analysis
• We theorize that the tasks cannot be solved instantaneously since subjects
first need to acquaint themselves with the tasks before solving them. But at
some point the hazard increase sharply. As some leave the sample since they
finish the task, the hazard may turn over and drop again as only the least
quick are left
• We hence use a log-logistic accelerated failure time model

ln(ti ) = α + βE Ei + βT Ti + βET E × T + βx xi + εit (1)

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Who is quick - Hazard rates

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Entrepreneurs are speedy

Without interactions With interactions

Without With Without With Shared

controls controls controls controls frailty
(1) (2) (3) (4) (5)

Explanatory variables
Entrepreneurial experience (EE) -0.101[0.002] -0.095[0.009] -0.001[0.982] 0.006[0.891] 0.005[0.917]
[0.032] [0.036] [0.041] [0.046] [0.048]
Haiku evaluation task 1.371[0.000] 1.367[0.000] 1.423[0.000] 1.421[0.000] 1.405[0.000]
[0.032] [0.031] [0.031] [0.032] [0.041]
Haiku writing task 2.227[0.000] 2.229[0.000] 2.329[0.000] 2.333[0.000] 2.261[0.000]
[0.046] [0.045] [0.059] [0.059] [0.047]
Demographics task Benchmark Benchmark Benchmark Benchmark Benchmark

EE×Haiku evaluation task -0.114[0.026] -0.116[0.000] -0.107[0.078]

[0.051] [0.052] [0.061]
EE×Haiku writing task -0.221[0.009] -0.224[0.000] -0.236[0.000]
[0.084] [0.084] [0.068]

Controls Yes Yes Yes Yes Yes

Observations/Subjects 1221/407 1221/407 1221/407 1221/407 1221/407
Log-Likelihood -1164.439 -1143.835 -1160.989 -1140.13 -1051.642
Log-Likelihood comparison -1140.13[0.000]
Wald χ2 3302.958[0.000] 3551.878[0.000] 4483.056[0.000] 4646.294[0.000] 1716.051[0.000]
Wald χ2 comparison 176.976[0.000]
γ 0.343[0.000] 0.337[0.000] 0.342[0.000] 0.336[0.000] 0.248[0.000] 45
Is there a difference and how big is it?

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What about the quality of the solutions?

Entrepreneurial
experience t
estimate value P > |t|

Performance in writing task

Average score given by peers 0.068 1.010 0.314
[0.067]

Deviance from 5-7-5 syllables rule 0.030 0.180 0.856

[0.167]

Performance in evaluation task

Deviance from other respondent’s evaluations 0.112 0.980 0.327
[0.114]

Congruence between actual syllables and subjective assessment 0.049 0.580 0.563
[0.084]

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Entrepreneurs as problem solvers

• Entrepreneurs are normally exposed to uncertain and challenging settings

that requires extensive decision making and problem solving with little
information
• Entrepreneurship provides individuals with cognitive frameworks different
from others – enables them to ”connect the dots” in a quick manner
• Entrepreneurs are generally often confronted by problems that are complex
and ill-structured teaching them how to more efficiently go about solving
such tasks
• Experienced entrepreneurs operate under substantial elements of
judgement, that is, decision-making in those situations where there is no
established rule, algorithm, heuristic etc. for reaching a decision
• Entrepreneurs often act according to own formed rules of thumb which
provides them with advantages in specific types of challenges

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Implications for entrepreneurs and business

• Entrepreneurs are not showing signs of being suitable for standardized work
tasks and environments
• Assembly work, simple service work, construction, etc.
• They may not even be suitable for positions/tasks that are complex in nature
and which has clearly boundaries for possible solutions
• Accounting, standardized engineering, logistics, law, etc
• But they will be functioning much better in settings and positions where the
tasks are more exploratory and possibly poorly defined in terms of operating
space
• Business development, R&D/Innovation, settings characterized by disruption,
crisis management, etc.

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