Lecture 1: Entrepreneurship – an opportunity-based
framework
Goals
- Understand the nexus between innovation and entrepreneurship
- Distinguish between startup innovation vs incumbent innovation
- Discuss advantages and prevalence of each mode of innovation
Innovation causes most markets to evolve in a characteristic pattern. Markets have periods
of comparative quiet = when firms that have developed superior products and technologies
earn positive profits. These periods are punctuated by fundamental shocks that destroy old
sources of advantage and replace them with new ones. Entrepreneurs who exploit the
opportunities created by the shocks enjoy economic profits during the next period of quiet.
Examples: Taxi vs Uber – Nokia vs iPhone – DVD vs MP3
Disruptive technologies
New entrants are associated with the creation of disruptive technologies = key drivers of
rising living standards. Incumbent firms often are associated with incremental innovations
that contribute more marginal gains to innovation and preserving market power.
Entrances (policy makers, government) are disruptive for new innovations.
Entrepreneurship as an opportunity-based framework (Shane & Venkataraman)
Entrepreneurship (innovation) = the discovery and exploitation of a lucrative opportunity
Opportunities = situations in which new goods, services, raw materials, and organizing
methods can be introduced and sold at greater value than their cost of production. (Casson,
1982)
Opportunities are objective, but the process to identify them is subjective. Entrepreneurship
requires that people hold different beliefs and capabilities about the value of resources.
Heterogeneity generates a comparative advantage that allows some individuals and not
others to act on certain opportunities.
Startup vs incumbent innovation
Startup (new product) vs incumbent (R&D for existing products)
Discovery (new/own invention) vs exploitation (external invention)
Entrepreneurship depends on who discovers and who exploits opportunities. Four types of
innovation depending on the locus (startups vs incumbent firms) of the two key stages of
entrepreneurship (discovery and exploitation)
, A. Incumbent innovation - All in-house (e.g. Apple iPhone/iPad)
The incumbent may discover the invention but prefer not to commercialize due to the well-
known Arrow replacement effect (lack of incentives to commercialize inventions that disrupt
current products of the firm).
B. Incumbent innovation - External Invention (e.g. patent trades)
Markets for technology are necessary for this option to be valid (hiring investors, licensing)
C. Startup innovation – Spinout (e.g. separating divisions of an established firm to a new
firm or an investor creating a separate startup)
D. Startup innovation - Entrepreneurial inventor (e.g. Apple, Facebook and Microsoft)
When markets for technology are not available, knowledge is tacit, etc.
Comparative advantages of incumbent innovators vs startups through
resources/legitimacy/organizational forms
framework
Goals
- Understand the nexus between innovation and entrepreneurship
- Distinguish between startup innovation vs incumbent innovation
- Discuss advantages and prevalence of each mode of innovation
Innovation causes most markets to evolve in a characteristic pattern. Markets have periods
of comparative quiet = when firms that have developed superior products and technologies
earn positive profits. These periods are punctuated by fundamental shocks that destroy old
sources of advantage and replace them with new ones. Entrepreneurs who exploit the
opportunities created by the shocks enjoy economic profits during the next period of quiet.
Examples: Taxi vs Uber – Nokia vs iPhone – DVD vs MP3
Disruptive technologies
New entrants are associated with the creation of disruptive technologies = key drivers of
rising living standards. Incumbent firms often are associated with incremental innovations
that contribute more marginal gains to innovation and preserving market power.
Entrances (policy makers, government) are disruptive for new innovations.
Entrepreneurship as an opportunity-based framework (Shane & Venkataraman)
Entrepreneurship (innovation) = the discovery and exploitation of a lucrative opportunity
Opportunities = situations in which new goods, services, raw materials, and organizing
methods can be introduced and sold at greater value than their cost of production. (Casson,
1982)
Opportunities are objective, but the process to identify them is subjective. Entrepreneurship
requires that people hold different beliefs and capabilities about the value of resources.
Heterogeneity generates a comparative advantage that allows some individuals and not
others to act on certain opportunities.
Startup vs incumbent innovation
Startup (new product) vs incumbent (R&D for existing products)
Discovery (new/own invention) vs exploitation (external invention)
Entrepreneurship depends on who discovers and who exploits opportunities. Four types of
innovation depending on the locus (startups vs incumbent firms) of the two key stages of
entrepreneurship (discovery and exploitation)
, A. Incumbent innovation - All in-house (e.g. Apple iPhone/iPad)
The incumbent may discover the invention but prefer not to commercialize due to the well-
known Arrow replacement effect (lack of incentives to commercialize inventions that disrupt
current products of the firm).
B. Incumbent innovation - External Invention (e.g. patent trades)
Markets for technology are necessary for this option to be valid (hiring investors, licensing)
C. Startup innovation – Spinout (e.g. separating divisions of an established firm to a new
firm or an investor creating a separate startup)
D. Startup innovation - Entrepreneurial inventor (e.g. Apple, Facebook and Microsoft)
When markets for technology are not available, knowledge is tacit, etc.
Comparative advantages of incumbent innovators vs startups through
resources/legitimacy/organizational forms
