Entrepreneurship Theories

The Power of Business Model Innovation: Strategy & Examples The ability of an entrepreneur to develop a distinctive business model separate from their rivals is intimately related to the success of an enterprise. Business Model Innovation is the art of redesigning how a business develops, delivers, and appropriates value. The key to success is not just having a good idea, but the ability to implement that idea effectively through a well-designed framework. Why It Matters Successful execution requires entrepreneurs to understand their customers' needs, identify market opportunities, and develop a clear value proposition . By innovating the business model, entrepreneurs can create a competitive advantage and position their companies for long-term success. Innovation can take many forms, including: Creating a new pricing strategy (e.g., Freemium). Developing a unique distribution channel (e.g., Direct-to-Consumer). Adopting a subscription-based recurrin...

What is a Corporate Spin-off? Definition, Strategy, and Examples Corporate Spin-offs: Definition and Strategy A corporate spin-off is a strategic decision by an organization's managers to form a new, independent organization for a specific unit of the company. Physically, the unit might move to a new location or stay in the same building, but operationally, it begins to function under a different corporate entity. How it Works: Compensation and Shares In a standard spin-off, the owners of the parent firm typically receive shares in the new spin-off company. This serves as compensation for allowing the unit to leave the parent's portfolio. For public companies , the spin-off receives a new ticker symbol and trades independently from the parent company's stock. This allows the market to value each entity separately, deciding if the split was a good idea for one, both, or neither. Why do Companies Spin-off? (Strate...

What is a Born Open Startup? Definition and Strategies What is a Born Open Startup? Definition & Strategy A startup that is "Born Open" is one that rejects the traditional notion of proprietary knowledge appropriation (e.g., obtaining patents). For these companies, software patents are often viewed as an obstacle rather than an asset. Instead, a Born Open startup views itself as part of an ecosystem . These firms typically operate autonomously but share interconnected goals, participating in a community with shared governance to prevent the exclusive appropriation of technology. [Image of diagram comparing closed innovation vs open innovation funnel] The Philosophy of Open Strategy According to Mekki MacAulay (2010): "Open strategy involves the collective production of a shared good in an open fashion such that the resulting product is available to all, including competitors. In the case of open entrepreneurship, ...

Architectural Innovation: Why Startups Beat Incumbents Why do established industry giants often fail to adapt to new technologies, leaving the door open for startups? The answer often lies in Architectural Innovation . Based on the seminal work of Henderson and Clark (1990) , this theory suggests that while incumbents excel at improving existing products, they struggle significantly when the underlying structure—or "architecture"—of a product changes. This weakness creates a massive opportunity for entrepreneurs. The Four Types of Innovation To understand why architectural innovation is unique, we must look at how it differs from other types of changes: Incremental Innovation: Improving individual components (e.g., a faster processor). Incumbents dominate here. Modular Innovation: Swapping a component with a new concept while keeping the system the same (e.g., replacing an analog phone dial with a digital keypad). Radical Innovation: Developing e...

Competence Destroying Innovation: The Entrant's Advantage Why do industry giants often crumble when faced with new technology? According to the seminal work of Tushman & Anderson (1986) , the answer lies in whether an innovation destroys or enhances the firm's existing strengths. The theory posits a simple rule: Competence-destroying innovations are brought to market more successfully by new entrants (startups), while competence-enhancing innovations are dominated by incumbents. Defining Competence To understand the theory, we must first define what makes a firm "competent." Competence = Abilities + Resources An incumbent firm's competence is "destroyed" when a technological innovation renders their existing abilities or resources obsolete. A classic example is Blockbuster vs. Netflix . Blockbuster’s massive retail footprint (a resource) and logistics for managing physical stores (an ability) became liabilities when Netflix introdu...

Dynamic Capabilities: How Startups Survive in Changing Markets Do entrepreneurs exhibit dynamic capabilities? The short answer is: they must if they want to survive. At the core of Dynamic Capabilities Theory is a simple but brutal truth: an organization's current resources, which may be perfect for today, will likely be irrelevant tomorrow. Recognizing that technologies, policies, and consumer tastes are in a state of constant flux, an organization needs the ability to adapt. What are Dynamic Capabilities? According to David Teece (2007) : "The competitive advantage of firms stems from dynamic capabilities rooted in high performance routines operating inside the firm, embedded in the firm’s processes, and conditioned by its history." In simpler terms, while "ordinary capabilities" help you do things right (efficiency), "dynamic capabilities" help you do the right things (adaptation). This involves a continuous cycle of sensing new op...

Information Asymmetry in Entrepreneurship: Definition & Risks Information asymmetry refers to a condition where two parties in a market or organizational relationship have access to different levels of information about an exchange. It acts as the alternative to the classical economic assumption of "perfect information." In the real world, one side usually knows more than the other, leading to power imbalances and market inefficiencies. 1. Regulatory Context: The "Insider" Problem Information asymmetries are the primary reason laws exist to forbid insider trading . Company insiders (CEOs, executives) possess a "high-definition" picture of the company's financial health, while the public sees a "low-resolution" version. As Aboody and Lev (2000) note, this gives insiders an unfair advantage when buying or selling stock. To counter this, executives have fiduciary responsibilities requiring them to be truthf...

Ambidexterity Theory: The Art of Balancing Innovation and Execution Why do some individuals excel at navigating uncertainty while others struggle? The answer may lie in their ability to be "Ambidextrous" —the mental agility to manage two contradictory thought processes at the same time. While this theory originated in organizational behavior, it has become a critical framework for understanding successful entrepreneurship. It suggests that a founder cannot just be a "dreamer" or a "doer"—they must be both. Exploration vs. Exploitation According to March (1991) , organizational learning requires a delicate balance between two distinct activities. Mom et al. (2015) propose that individuals are ambidextrous if they are effectively involved in both: Exploration: Activities such as search, play, experimentation, ideation, and radical innovation. (The "Dreaming" phase). Exploitation: Activities such as refinement, execution, sele...

Niccolò Machiavelli (born 1469) was an Italian diplomat and infamous strategist who wrote extensive letters teaching cunning strategies to "princes" ruling over territories throughout Europe. 16th-century Europe was very divided compared to today, especially in and around Italy, which was composed of a large number of small autonomous and semi-autonomous territories (city-states and kingdoms). Princes as Early Entrepreneurs Although Machiavelli is often considered a figure in the history of political science, these rulers acted as what Baumol (1996) describes as entrepreneurs of their time. Princes would take territory, or castles, rather than fight over money. Machiavelli's letters can be thought of as elaborating entrepreneurial strategies to get ahead in feudal times. However, many of these are largely inappropriate in the current business context. Core Machiavellian Axioms Many regard Machiavelli's strategies as unethical, yet his famous book The Prin...

First Mover Advantage: Is it Better to be First or Fast? Should entrepreneurs strive to be first? This question haunts every founder deciding when to launch. Given the option to implement two ideas—one with early entry potential and the other with late entry potential—which should an entrepreneur run with? The Case for Going First According to Kerin et al. (1992) , "studies purport to demonstrate the presence of a systematic direct relationship between order of entry... and market share." First Mover Advantage Theory posits that new entrants who capture a market niche earliest gain specific competitive edges: Brand Awareness: Being "the original" creates a reputation for innovativeness that followers struggle to match. Supplier Lock-in: First movers can "tie up factor markets" by engaging in long-term contracts with key suppliers. This makes it harder for followers to acquire the necessary materials to compete. The Experience Cur...

A stakeholder approach to entrepreneurship has roots in a debate that occurred between professors Ron Mitchell and S. Venkataraman in 2002, regarding the connections between stakeholder theory (Freeman, 1984) and entrepreneurship. Historically, stakeholder theory was born out of studies of large corporations managing their stakeholders to improve incumbent firm performance. It had not been fully applied to the entrepreneurship area to explain entrepreneurial behaviors, processes, or outcomes. The Tension: Creation vs. Distribution Entrepreneurship and strategy research tends to focus on how new wealth is created , whereas stakeholder theory historically focused on how that wealth should be distributed . For some, value creation and distribution are separate problems requiring different logics. However, a Stakeholder Theory of Entrepreneurship seeks to integrate the wealth creation and redistribution problems. The Core Mechanism: Marginalized Stakeholders Developed economie...

Contingency Theory: Why There Is No "Best" Way to Manage If you ask a Contingency Theorist how to run a company, they will give you the most annoying answer in business: "It depends." Contingency Theory proposes that an organization's success is not determined by following a specific script, but by how well its internal resources, structure, and strategies align with the external environment. This includes political, economic, social, and technological conditions. The Concept of "Strategic Fit" Central to this theory is the concept of Fit . This refers to the degree to which the organization's characteristics match the turbulence of the environment. A good fit leads to profit; a poor fit leads to failure. This implies a crucial lesson for founders: There is no one-size-fits-all strategy for organizational design. What works for Google will destroy a local utility company, and vice versa. Equifinality: Organic vs. Mechanistic At the h...

Disruptive Innovation Theory: Why Giants Fall How did Netflix kill Blockbuster? Why did iPhones replace Nokia? The answer often lies in Disruptive Innovation Theory . Developed by Harvard Business School professor Clayton Christensen in his famous book, The Innovator’s Dilemma (2003) , this theory explains why seemingly successful, well-managed companies often fail when faced with new technologies. The Two Types of Innovation Christensen’s core argument is that innovation comes in two forms: Sustaining Innovations: These improve existing products along traditional dimensions of performance. They make good products better. Example: A new smartphone with a faster processor and a better camera. These appeal to existing, high-end customers. Disruptive Innovations: These are initially lower performing along traditional metrics, but compensate with increased simplicity, convenience, customizability, or affordability. They appeal to new, often overlooked, custo...

Strategic Disagreements Theory: Why Employees Create Spinouts Strategic Disagreements Theory , introduced by the late American economist Steven Klepper (2007), explains a specific type of entrepreneurship known as the Employee Spinout . The theory posits that spinouts are not random; they are the result of a rational disagreement between an employee and a manager regarding the value of a new idea. The Core Mechanism: How Disagreements Create Rivals Firms often generate more ideas than they can exploit. According to Bhide (1994), many entrepreneurs report that they are exploiting ideas that were originally generated inside their previous employers' organizations. A "Strategic Disagreement" occurs when the employee and the firm have different assessments of an innovation's potential (Thompson & Chen, 2011). This can happen in two ways: The Frustrated Innovator: An employee believes the firm should pursue a new technolog...

What is Upper Echelons Theory? Definition & Startup Impact Upper Echelons Theory (UET) , introduced by Hambrick and Mason (1984), operates on a powerful premise: top managers' decision-making processes determine competitive strategies, and these strategies determine firm performance. "The organization is a reflection of its top managers." In short, to understand why a company acts the way it does, you must study the biases, values, and experiences of the people in the C-Suite. The Core Mechanism: Opening the "Black Box" Traditional economics often treats the firm as a "black box" that makes rational decisions. UET opens that box. It argues that executives cannot scan every piece of information in the world. Instead, they view the world through a lens filtered by their own Bounded Rationality . Research focuses on two types of characteristics that filter this lens: Observable Characteristics (Prox...

Knowledge Spillover Theory: Why Smart Employees Leave Big Companies Big companies spend billions on R&D, yet startups often commercialize the most disruptive innovations. Why? Knowledge Spillover Theory (Acs et al., 2009) argues that productive innovation doesn't just come from R&D spending; it comes from the leakage of ideas. Knowledge is inherently "leaky," moving through networks and via stakeholder mobility. The Knowledge Filter The core of the theory is the concept of the Knowledge Filter . Incumbent firms create massive amounts of new knowledge. However, they are often inefficient at exploiting it. They filter out ideas that don't fit their current strategy or profit models. This unused knowledge "spills over" into the economy. [Image of knowledge spillover theory diagram] Why Incumbents Waste Knowledge Why would a company invent something and then not use it? Agarwal et al. (2010) identify several reasons why incumbents le...

Stewardship Theory: Are Managers Selfish or Selfless? For decades, economics was dominated by a cynical view of human nature known as Agency Theory . In the late 1980s, Lex Donaldson and James Davis introduced a compelling alternative: Stewardship Theory . This theory challenged the prevailing assumption that managers are inherently opportunistic, proposing instead that they can be trustworthy stewards motivated by the greater good. The Great Debate: Agency vs. Stewardship To understand Stewardship, you must first understand what it is reacting against. 1. Agency Theory (The Cynical View) Rooted in economics, this theory assumes that agents (managers/entrepreneurs) are self-interested and opportunistic. The relationship between the "Principal" (investor) and the "Agent" (manager) is one of inevitable conflict. The Problem: Managers will prioritize their own wealth over the shareholder's returns. The Solution: Control mechanisms. Stock...

Jay Barney developed the Resource-Based View (RBV) of the firm, a strategic management theory designed to explain why some firms perform better than others even when they occupy a very similar business environment. The RBV seeks to explain performance by looking to the firm's internal resources. This contrasts with earlier perspectives, such as Porter's Five Forces , which focus on the external environment as sources of threats and opportunities. The Core Idea: Competitive Advantage The core idea behind the resource-based view is that competitive advantage comes from a firm’s effective use of tangible and intangible assets. Tangible Assets: Plant, equipment, and human resources. Intangible Assets: Trade secrets, corporate reputation, and tacit knowledge. The VRIO Framework According to Barney (1991), resources are sources of sustained competitive advantage only if they meet specific criteria. When resources are bundled or combined, they can be mutually ...