The Degree of Innovative and Entrepreneurial Activity - Assignment Example

Discuss the organisational and managerial factors which influence the degree of innovative and entrepreneurial activity occurring within an organisation. Identify the areas for your personal development with respect to entrepreneurial and innovative practices. Organizations often face complex choices involving uncertainty, trade-offs, and broad consequences, but responding to such situations in rational ways can be hampered by individual decision makers' cognitive limitations. With a myriad of time, cost and processing constraints, decision makers often fall short of rationality (March & Simon, 1958). Explanations of corporate growth and development, and of the organization's ability to maximise profitability over time have increasingly relied on the entrepreneurial function (Greiner, 1972). Simply defined, an entrepreneur is someone who organizes and assumes the risk of a business in return for the profits. Entrepreneurial success depends on the ability to think strategically, have a clear strategic vision, and achieve quick results. The meaning of entrepreneurship is bound up with the concept of uncertainty. Entrepreneurs create value by acting in the context of uncertainty. As Knight (1921) puts it, the entrepreneur is the "organizer of uncertainties," which means he possesses the ability to creatively reorganize the relationships between factors of production and market opportunities in ways that create value which otherwise would not have been generated. The ability to organize wealth-generating relationships between factors of production presupposes that a market opportunity exists for the entrepreneur to capture. This gives rise to the concept of the entrepreneur as being "noticer of opportunity" (Kirzner, 1973). Entrepreneurial behaviour is, thus, described as action taken on noticed opportunities. Markets are almost always in disequilibrium and based on price disparity and information asymmetry, there always exists opportunity for arbitrage. This opportunity, however, only generates value for the noticing entrepreneur. It can be deduced that value is generated not only by an entrepreneur who is "organizer of uncertainties", but also by the entrepreneur who is "noticer of opportunities" (Jones & Butler, 1992). In entrepreneurship, once an opportunity has been acted upon, a series of internal forces begin to interfere in the entrepreneurial process. A distinction arises between entrepreneurship and management in the firm, leading to agency problems. The agency problem occurs when it is difficult for one party to evaluate the performance of the other due to uncertainty in environmental, organizational, or task conditions. Moreover, the motives of the parties to an exchange may be different giving rise to opportunism and, in turn, agency problem (Jones & Butler, 1992). In the entrepreneurial context, risk preferences cause an agency problem because the principal and agent have different risk preferences. Agency theory elaborates on the different risk preferences by discussing risk aversion of agents stating that the agents are only rewarded normal salary even though they have to bear the uncertainty of entrepreneurial activities. On the other hand, the principal is the residual claimant of all net revenues of the activities. The reward to the principal is the entrepreneurial profit for undertaking uncertainty whereas the reward to the agent is normal salary for risk taking. This disparity in reward structure gives rise to agency problem where agents have no incentive to behave entrepreneurial (Jones & Butler, 1992). Agents face an additional problem if they have injected any capital in the organization. This is because if the organization engages in a risky venture and faces bankruptcy, the agents lose their capital and have difficulty in securing equivalent alternative employment. Therefore, there is no incentive for agents to invest in the organization. This causes a misalignment of interests of principals or entrepreneurs and agents or managers and results in a loss in a firm's entrepreneurial ability (Jones & Butler, 1992). Thus, from an agency theory perspective, the key element is to define and control who is the principal and who is the agent in the entrepreneurial context. Agency problems increase geometrically as new levels of the hierarchy take on the entrepreneurial role because the incentive is for managers to pave ways for opportunism to maximise their personal financial returns (Cooper & Dunkelberg, 1986). Thus, the intrinsic nature of the entrepreneurial process makes it risky, or unprofitable, for individuals to display entrepreneurial behaviour designed to produce above average returns. Agency problem, therefore, makes it difficult for a firm to maintain high levels of internal corporate entrepreneurship. With the lowering of corporate entrepreneurial behaviour, new forces are set in motion. Bureaucratization tends to set in as firms become large and established (Peterson, 1981). Bureaucracy reduces the visibility of the agent's performance because people begin to work in structured teams. Increase in bureaucratization lowers agent motivation. Agents feel frustrated within the organization when their performance is not appreciated and recognized. They tend to look outside the organization for better opportunities. Thus, one result of agency problems may be the departure of employee entrepreneurs to found their own firms since capital gained by entrepreneurs in one firm is transferable to another (Cooper, 1985). This action reduces the ability of the original firm to notice opportunities, while creating new entry into the industry by entrepreneurs who left as agents and now function as principals. The original firm faces the prospect of a decline in its ability to earn entrepreneurial profits as a result of a decline in noticing opportunities. Organizational age, size and complexity also play a role in promoting agency problems. Organizational size causes agency problems in several ways. First, the separation between entrepreneurship and management increases as the firm grows, leading to an increase in risk aversion. Increased size also increases the opportunism problem because as the number of agents involved in the entrepreneurial process increases, so does the likelihood for their respective personal interests (Jones & Butler, 1992). Moreover, as firms grow, there is an increased use of teams in research and development and product development. Although this is positive in terms of better problem-solving capability for the organization, the effect on entrepreneurship is that it becomes harder for the individual entrepreneur to prove his discrete role in the innovation process and claim his reward for the entrepreneurial behaviour. The result can be either withholding of ideas or departure from the organization to set up a competitor for the original firm as discussed above (Hounshell & Smith, 1988). Organizational age is also a factor in understanding agency problems. Evidence suggests that there tends to be an age-size correlational relationship such that older firms are less likely to notice and take action on entrepreneurial opportunities because of the inability to anticipate the need for productive change and their resistance to new ideas (Kanter, 1983). With growth, there is bound to be an increase in organizational complexity. Organizational complexity leads to an increase in horizontal and vertical differentiation, which may contribute to agency problems. For instance, the proliferation of hierarchical levels and the growth in the number of operating subunits makes acting on noticed opportunities difficult, and serves to make entrepreneurs act as agents, not principals. These factors reduce the level of entrepreneurial responsibility and increase the possibility that rewards will not accrue to the entrepreneur personally (Jones & Butler, 1992). With such problems inherent in organizational growth due to entrepreneurship, it cannot be misleading to believe that an increase in organizational age, size and complexity will lead to decreasing entrepreneurial returns. Many of the agency problems caused by the organizational factors can be solved by designing the entrepreneurial context in such a way so as to align interests of principals and agents. Innovations in organizational structure and innovations in organizational control and reward systems can mitigate the split between the role of principal and agent in the entrepreneurial context. Businesses have come to realize the importance of innovation for survival in a world of global competition. Innovation can be described as "an idea, practice, or object that is perceived as new by an individual or other unit of adoption" (Rogers, 2003, p.11). Early innovation theories considered the role of individuals to be a fundamental issue behind the innovation, change, and adoption of new ideas and practices (Lewin, 1947). Attitudes and values of individuals within an organization have been recognized as influential in the ability of the organization to innovate (Rogers, 1962). When an enterprise is in full swing operation, the entrepreneur decides on the desired level of growth and plans how to achieve it. Growth and performance are determined by several factors influencing entrepreneurial success. Performance is not only affected by effort, but also by skills, ability, traits and perceptions of roles. Moreover, there are internal and external factors that influence the entrepreneur's performance. These factors are grouped into triggering factors, enhancing factors, and sustaining factors. Triggering factors compel the entrepreneur to go into thinking. These include personality and motivation. Enhancing factors are known to influence the entrepreneur into doing. They include management skills and ability, and level of formal and informal education attained. Education is another essential factor that lifts performance and growth. The optimum development of an individual intellectually, mentally, socially, culturally, economically, and psychologically make possible for an entrepreneur to perform better. According to Shapero (1982), an organization's entrepreneurial potential can be increased by increasing the quantity and quality of potential entrepreneurs within that organization. This, in turn, can be achieved by increasing the quantity and quality of opportunities perceived by organization members (Krueger & Brazeal, 1994). An inadequate level of innovative activity may reflect an inadequate supply of opportunities perceived by organization members. This condition can also be termed as inadequate entrepreneurial thinking. Corporate entrepreneurship may take many forms like new ventures, new product development, or even strategic reorientation. However, the common theme behind this is innovation. As firms grow, they need to provide the incentives for agents to act as principals. In other words, firms need to find ways to provide agents with the opportunity to take responsibility for entrepreneurship; recognize individual performance contributions; and reward entrepreneurial performance appropriately (Jones & Butler, 1992). This can be achieved by innovating to ensure that the visibility of an agent's performance is raised and the bearing of uncertainty encouraged. One such innovation can be the movement of the organization from a functional structure to a product structure, and eventually to a multidivisional structure (Weber, 1947). Opportunities can be acted upon more quickly and efficiently in the multidivisional structure because a corporate headquarters is devoted solely to noticing opportunities in such a structure. This isolates entrepreneurship at the top of the organization and reduces agency problems associated with organizational size and complexity. However, though this change is necessary is promote entrepreneurship, it is not sufficient in solving agency problems. The main concern still persists, that is, who is the principal and who is the agent. It is not clear whether establishing a corporate headquarters is sufficient to encourage entrepreneurial behaviour. Another structural innovation that may raise agent visibility and increase accountability may occur if an organization establishes a new venture division that separates the entrepreneurial component of the firm from the operating component. However, this accountability and agent visibility would still depend on the relationship between the parent company and the new venture company. In the entrepreneurial context, monitoring entrepreneurial behaviour and its outcomes to align interests between the principal-agent relationships is very expensive and is only possible over the long term. In this regard, an outcome-based contract is termed as an appropriate contract to reduce opportunism and increase bearing of uncertainty. An outcome-based contract aligns the preferences of the agents with principals since rewards for both the parties are based on the same actions (Jensen & Meckling, 1976). However, as with any reward system, there are problems associated with using output reward systems to link reward to performance. Linking performance to reward may be difficult because different people are involved in the innovation process and may drop out at any stage of the process depending on the task under consideration, such as market versus technical considerations (Angle & Van de Ven, 1989). In general, establishing an equitable reward system to promote inside entrepreneurship is a daunting process since importance should not be solely placed on the equitable distribution of rewards, but also on the equity of the procedures for determining rewards in maintaining long-term entrepreneurial behaviour. Conclusion Entrepreneurship is central to the value-creation process and the main issue facing any organization is to optimize the entrepreneurship-management link, whereby the organization must solve agency problems so as to achieve entrepreneurial profits through innovation. The entrepreneur is more the inventor or an individual capable of implementing a new innovation. Entrepreneurial profit can be obtained across functions and at all levels in the organization, provided an equitable structure is in place that aligns interests and rewards employees for their individual contributions. Successful entrepreneurship puts pressure on the manager to bureaucratize the organization. Firms wishing to maintain entrepreneurial capability face limits on the structural adjustments due to the agency problems. Therefore, ways must be found to separate entrepreneurs from organizational controls so that the opportunity-noticing capability is maximised if the organization is to generate entrepreneurial profits and grow. REFERENCES Angle, H., & Van De Ven, A. (1989). Suggestions for Managing the Innovation Journey. Research on the Management of Innovations: The Minnesota Studies. New York: Harper & Row. Cooper, A.C. (1985). The Role of Incubator Organizations In The Founding of Growth-Oriented Firms. Journal of Business Venturing, 1(Winter): 75-86. 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