Entrepreneurial

Leadership,

Capabilities and

Growth

Andy Lockett, James Hayton,

Deniz Ucbasaran, Kevin Mole,

Gerard Hodgkinson

Overview

• Introducing a model of leadership, capabilities and

growth.

• Substantive (growth) capabilities: combinations of

processes, routines and resources that enable growth

along one or more direction.

• Leadership: taking an organization into the future,

through the identification and exploitation of

opportunities; requiring vision to produce useful

change.

• Dynamic capabilities: extend, modify or create new

substantive (growth) capabilities.

• Policy implications.

Leadership, Capabilities and Growth

Growth Capabilities

New Products, Existing Markets

(new product development)

New Products, New Markets

(diversification)

Existing Products, Existing Markets

(market penetration)

Existing Products, New Markets (e.g., Internationalization

and market development)

Four possible growth vectors

(Ansoff, 1957)

Substantive (growth) processes

• There are identifiable and ‘best practice’ processes

supporting each growth vector • Market penetration processes (e.g., continuous improvement, supply

chain management)

• Innovation supportive processes (e.g., NPD process; customer

intelligence)

• New market development/internationalization processes (e.g.,

country choice, entry mode choice/execution)

• Growth is promoted by ‘growth accelerators’: alliances,

joint ventures, acquisitions • For SMEs Growth accelerators impacted by quality of underlying

processes (Lu & Beamish, 2006; Schlosser, 2001):

• Alliances, Joint Ventures (partner identification, governance etc.)

• Mergers and Acquisition processes (target identification,

integration management etc.)

General management processes

support growth

• Firm profitability precedes value-creating growth (e.g., Davidsson et al., 2009).

• Strategic management • Strategic management guides choice, provides direction (Kraus et

al., 2006) • Strategic decision making and resource allocation routines (e.g.

Eisenhardt, 1989)

• Exit routines (e.g., Burgelman, 1994)

• Many SMEs lack effective strategic management (Sandberg et al., 2001).

• Functional management • Functions provide inputs into, and complementarities with growth

processes in SMEs • Financial management (McMahon, 2001).

• HRM (e.g., Hayton, 2003)

• Marketing and customer development (Day, 1994).

• There is wide variation in formalization of functional processes in SMEs, but generally less developed than larger firms.

Growth supportive resources

• Key resources: financial and intellectual capital

• Financial slack is essential for uncertain entrepreneurial growth strategies (George, 2005)

• Too little, or too much slack inhibits innovation (Nohria & Gulati, 1996; Tan & Peng 2003).

• Intellectual Capital:

• Human capital promotes SME capacity to learn (Hayton & Zahra, 2005; Simsek & Heavey, 2011).

• Social capital and the position of the firm in knowledge networks impacts performance of SMEs (e.g., Collins & Clark 2003; Collins, et al., 2006).

• Intellectual capital increases the extent to which acquisitions and alliances produce profitability and growth (Zahra & Hayton, 2008).

Substantive growth capabilities:

What we know/don’t know

• General management capabilities influence growth/yet are often lacking in SMEs (Kraus et al., 2006; Sandberg et al., 2001).

• Research is needed with respect to: • prioritization (e.g., developing customers versus managing people;

strategic versus financial management?)

• barriers to development (e.g., Top management vs functional capacity?)

• interdependence between growth processes and resources

• Growth is often treated as the dependent variable – source of growth capabilities are rarely the focus • Gap in our understanding of how growth processes and routines develop

in SMEs (Barbero et al., 2011; Wiklund et al., 2009).

• Growth capabilities depend on entrepreneurial leadership (Amit & Shoemaker, 1993; Penrose, 1959) • How do leadership and entrepreneurial capability impact the development of

growth capabilities?

Leadership

Leadership: Cognition &

motivation

• Growth opportunities cannot be identified and

exploited without the facilitation of individual and

collective activity (Ensley et al., 2006)

• Leadership – individual or collective – has a strong

imprinting effect in SMEs (Boeker, 1989; Eisenhardt

and Shoonhoven, 1990)

• Thus understanding the cognitive and motivational

profile of the leadership (team) becomes important

Entrepreneurial cognition:

What we know

• Prior knowledge and experience can favourably influence • The ability to identify opportunities (which affects growth) (Gruber et al.,

2012, 13; Ucbasaran et al., 2009)

• The acquisition of human, social and financial resources (e.g. Gompers et

al., 2010; Mosey & Wright, 2007; Starr & Bygrave, 1991; Zhang, 2011)

• Knowledge diversity within the team contributes to • Opportunity identification (Gruber et al., 2012),

• Learning (Clarysse & Morey, 2004),

• Acquisition of resources needed for growth (Hayton & Zahra, 2005)

• Growth itself (Eisenhardt & Shoonhoven, 1990).

• BUT diversity can lead to functional and dysfunctional conflict.

• Benefits of diversity contingent on strategic consensus and team

cohesion.

What we don’t know about

entrepreneurial cognition

• Knowledge and experience is a proxy for cognition

• Individuals and groups vary in terms of:

• a) how they make sense of experience

• b) process new information

• c) use knowledge – i.e. cognitive processes (e.g.

intuition and analysis; categorization)

• The extent to which mental models are shared and

the effects of this are not known

Entrepreneurial motivation:

What we know

• In the absence of motivation, knowledge and experience

may not be put to the most productive use. Two

approaches to understanding motivation are relevant:

• 1. Goal setting • Specific, challenging goals result in higher performance than vague and

/ or easy goals (Locke & Latham, 2002).

• Preliminary evidence suggest this holds for SMEs (Baum et al., 2001.

Baum & Locke, 2004)

• 2. Intentions • Influenced by desirability (attitudes & goals) and feasibility

(entrepreneurial self-efficacy) (Chen et al., ‘98)

• Growth oriented entrepreneurs associated with positive attitudes

towards income, negative attitudes toward work enjoyment and have

high entrepreneurial self-efficacy (Douglas et al., in press)

What we don’t know about

entrepreneurial motivation

• How does collective motivation emerge?

• What is the role of individual motivation (goals /

intentions)?

• Role of entrepreneurial self-efficacy vis-à-vis

collective entrepreneurial efficacy

• How do leaders (leadership teams) set goals?

• What is the relationship between cognition (e.g. prior

experience of failure; attitudes towards failure) and

motivation?

Dynamic capabilities

Dynamic capabilities

• Dynamic capabilities are “the abilities to reconfigure a firm’s

resources and routines in the manner envisioned and deemed

appropriate by its principal decision-maker(s)” (Zahra et al., 2006)

• Creating dynamic capabilities requires the development and

refinement of routines for identification and exploitation of

opportunities (Eisenhardt & Martin, 2000; Feldman & Pentland,

2003; Teece et al., 1997; Teece, 2007; Zollo & Winter, 2002)

• In SMEs, dynamic capabilities may be based on the skills and

knowledge of an entrepreneur or entrepreneurial team (Teece,

2012)

Opportunity identification • The ability to locate value in some market or technological condition

through the application of a new means-end relation framework that

is unknown or unavailable to others (e.g., Ardichvili, et al., 2003).

• The firm’s productive opportunity set: “all of the productive

possibilities that its entrepreneurs see and can take advantage of”,

is shaped by both entrepreneurial perceptions of market demand

and the resources at their disposal (Penrose 1959: 31)

• Resource functionality (Wernerfelt, 1984)

• Resource (re)combinations (Lockett et al., 2009)

• Closely tied to the process of knowledge acquisition (Zahra et al.,

2006)

• The discovery of entrepreneurial opportunities is aided by the creation

of new information channels between the organization and the

environment (Ardichvili et al., 2003; Shane & Venkataraman, 2000;

Wiklund & Shepherd, 2003)

Opportunity exploitation

• A new opportunity/idea must undergoing a process of validation

in order to be accepted, integrated, and exploited (Floyd &

Woodbridge, 1999; Zahra et al., 1999)

• The opportunity/idea may need to be aligned with organizational

goals and activities, or alternatively, the organizational strategy

may be adapted to the new opportunity (Burgelman, 1983; Guth

& Ginsberg, 1990)

• Prove the opportunity viable to gain resources (Burgelman, 1983)

• Importance of champions (Day, 1994; Floyd & Wooldridge, 1999;

Howell & Higgins, 1990)

• OE is a process that moves from the individual to venture level

(Burgelman & Sayles, 1986; Floyd & Wooldridge, 1999)

• Managerial processes and systems, structures, cultures and values

all shape the integration of new knowledge and the decisions about

OE (Smith et al., 2005; Verona, 1999)

What we know

• Dynamic capabilities enable a firm to move beyond ad-hoc

opportunity identification and exploitation, through developing a

systematic processes for promoting sustainable growth.

• Dynamic capabilities have a positive effect on firm performance,

both measured in terms of market and financial performance

relative to firm’s main competitors and industry averages (e.g.,

Helfat, 1997; Majumdar, 1999; Pisano, 2000; Rindova & Kotha,

2001).

• Dynamic capabilities are positively linked to the substantive

capability development (e.g., Figueiredo, 2003; Clark & Fujimoto,

1991; Woiceshyn & Daellenbach, 2005).

• Capability development is a mediator of the relationship between

dynamic capabilities and firm performance (Petroni, 1998; Clark &

Fujimoto, 1991; Brady & Davies, 2004).

What we don’t know

• “How” do managers or organizations create dynamic capabilities

and improve the organization’s ability to perform? (Pablo et al.,

2007)

• Existing research tends to focus on larger more established

organizations – few studies address dynamic capabilities in

SMEs (Arthurs & Busenitz, 2006; Zahra & Filatotchev, 2004)

• We know very little about the contingencies that allow some

firms to learn, and build dynamic capabilities, while others do

not.

• e.g., in terms of the individual entrepreneur and the

entrepreneurial team’s cognition and their intentions for

building high growth enterprises (Hodgkinson & Healey,

2011)

Policy

Policy challenges

• Growth is multi-causal, and has multiple pathways,

and derived from ‘socially complex’ capabilities:

• What works in one context does not work in another

• SMEs often lag behind good practice (Storey, 2003)

and invest less in management development than

larger organizations (Hoque & Bacon, 2008)

• Perceived competition is not the main reason for adopting

new practices (Mole et al., 2004)

• SMEs may be more likely to upgrade capabilities

when encouraged by important customers (Ram,

2000)

Policy: Leadership

• Growth intentions are a function of desirability and

feasibility of growth

• Feasibility beliefs:

• Influenced by understanding the growth vectors, drivers of growth,

and the processes and resources that support them

• Understanding enhanced through training, information

dissemination and business support (e.g., UKTI)

• Desirability beliefs:

• Positively influenced by reflection on business needs and

opportunities (Jones, et al., 2008)

• Supply chain support and coordination policies indirectly increase

incentives of SMEs to invest in capability development

Policy: Dynamic capabilities

• Policy goals for Dynamic Capabilities:

• Promoting knowledge exchange opportunities

• Building organizational capacity for exploiting these exchanges

• Link SMEs with customers, suppliers, universities, competitors or

unrelated organizations (e.g., clustering initiatives; KTPs; university

partnerships; industry and trade groups)

• Evidence:

• Knowledge Transfer Partnerships, Innovation Vouchers, and

Industry-University consortia create inter-organizational knowledge

sharing networks

• Opportunity identification supported by reflection (Jones et al, 2008)

• Evaluations of Business Link showed intensive, longer-term,

interventions more effective for growth (Mole et al., 2011)

Policy: Growth capabilities

• Policy goals for Substantive Capabilities:

• Developing managerial understanding of alternative growth vectors

• Disseminating good practices for growth processes

• Developing, managing or accessing needed resources (intellectual

and financial capital)

• Evidence:

• Low-cost ‘taster’ approaches may not have long-term benefits

• Intensive, individualized coaching is an effective mechanism for

disseminating knowledge to SME managers (Mole et al., 2011)

• Adviser networks assist firms in developing capabilities (Bishop,

D’Esteb, & Neely, 2011)

Policy: Overall

• Because growth is multi-causal, tailored programmes are

an effective policy intervention:

• Intensive, individualized coaching is an effective mechanism for

disseminating knowledge to SME managers (Mole et al., 2011)

• Developing managerial understanding of alternative growth vectors

• Disseminating good practices for growth processes

• Developing, managing or accessing needed resources (intellectual

and financial capital)

• Evidence:

• Low-cost ‘taster’ approaches may not have long-term benefits

• Adviser networks assist firms in developing capabilities (Bishop,

D’Esteb, & Neely, 2011)

Next steps

Next steps

• The questions:

• What are the priorities for, and barriers to, the development of

substantive growth capabilities?

• What shapes entrepreneurial cognition and growth intentions in

SMEs?

• How do entrepreneurial cognition, and growth intentions, shape

the development of dynamic and substantive capabilities for

supporting sustained growth?

• How do dynamic capabilities evolve in SMEs?

• How do dynamic capabilities lead to the re-shaping of the

venture’s substantive capabilities for growth?

• How will we address the questions?

• Qualitative case-studies

• In-depth survey of SMEs