Project-Driven Technology Strategy

born.

Introduction

As we begin, it is important to define important terms that will become central to the arguments presented in this book. The worst way to start would be to assume that the expression Product-Driven Technology Strategy is self-explanatory. Many people have an implicit understanding of these words and other terms that may need some un-learning, which can be difficult.

In the following passage, italics have been added to identify key business terms and theoretical constructs. Dodgson (2000) noted,

Technology Strategy comprises the definition, development, and use of those technological competencies that constitute their competitive advantage…[it] becomes strategic when investment decisions are made in these areas with the intent of extending technological competencies, and when major organizational issues are addressed…with the aim of linking product lines more closely with competencies…Technology Strategies involve identifying the key technologies that underpin the firm's present and future value-creating activities and ensuring that they are improved, supplemented, and effectively introduced and used…the most important challenge of strategy lies in combining these ingredients with strategic direction and with appropriate organizational structures. (p. 134)

Dodgson's words summarize and reflect years, decades, and in some cases, a century of research into perhaps 10 disparate fields of academic scholarship in management and economics. A significant portion of this corpus will be used to develop a view that constitutes the arguments made in this book. We will use other seminal books and articles too, as well as less scholarly materials that help illustrate important points.

While cited publications are excellent for their intended purposes, however, some do not apply theory to practice very completely. This limitation of the literature is not difficult to understand. In fact, it is quite natural and to be expected. There is no theory of project management, since it has emerged in the field—mostly guided in the United States by the Project Management Institute (PMI) and its central canon, A Guide to the Project Management Body of Knowledge (PMBOK® Guide), (Project Management Institute, 2008). The PMBOK® Guide has no academic counterpart, yet it is viewed as the most legitimate source of best practice by about 500,000 PMI stakeholders, where over 300,000 hold respected and valued professional certificates. One might dare to consider that an institutional market.

The PMBOK® Guide is not confined to issues of technology management, and it does not take a strategic view of running a project-driven enterprise. Nevertheless, technology project managers use it regularly and voraciously. It applies not only to managing individual projects but also to managing project portfolios, project management offices, and programs that are organized by project. PMI publishes works written for managers of project managers [sic], but the view taken in this book is of the broader market noted previously. It seemed reasonable to write a book designed to get the respective academic and practicing communities talking to each other a little better. That is the main hope for this book.

Then there is the issue of just what a technology project manager is at the core. In other words, in what organizational function would one find all the technology project managers? Actually, the question is absurd. While many organizations provide an administrative/reporting home for project managers, technology is not an economic function like manufacturing, engineering, marketing, human resources, legal and contracting, and so forth. Much more likely, the type of project team of interest in this book will be multidisciplinary. Project management represents the very idea of managing multifunctional teams of disparate specialists.

Though many technology projects are contained in a centralized research and development function, our concern is mostly about business strategy, which by definition is a view that is not only organization-wide but also fully integrative of all functions of the firm.

We might alternatively think of new product development (NPD) as its focus, except that would bring us back to the same problem—NPD is not a functional unit, it is a goal and/or set of processes.

Rather, the author has written a book for technology managers of endeavors of significant strategic importance, including executives who determine technology and business strategies in the first place. It is NPD-centric, and somewhat oriented toward the interests of technical specialists (including engineers) and their managers. Readers from less technical functions and projects should have no problem, though, and many could probably benefit from understanding a technician's point of view a bit better. The ideas in the book are not limited to any field. On the contrary, running a business is largely a matter of functional integration.

Toward that end, let's first preview the points made throughout the upcoming chapters.

PREMISES

Business strategy isn't about competing well, it's about winning.

Winning isn't everything, but losers get fired.

As we address these realities, our argument will proceed like this:

Economic Philosophy: Entrepreneurship Is the Essential Fact of Capitalism

In 1942, economist Joseph Schumpeter called entrepreneurship the essential fact of Capitalism (Schumpeter, 1976, p. 83).

Schumpeter noted that entrepreneurship was an economic phenomenon, not a kind of organization large or small, and that the entrepreneur is its agent, whatever role this agent might play. The entrepreneur is an agent of the force called entrepreneurship.

As a phenomenon, entrepreneurship and its agents can be found in any organization regardless of any characteristics such as industry, markets served, technologies used, age, or size.

Entrepreneurship in an economy is seen in the kinds and levels of creative destruction that challenge old ways not follow the tyranny of efficient equilibriums and existing markets.

Creative destruction adds value to an economy through a process called innovation.

Entrepreneurship as a phenomenon is about elevating—not maximizing—a prudent investor's risk/return comfort zone.

The systematic corporatization of the entrepreneurship phenomenon is exactly what Schumpeter predicted would happen 100 years ago. Corporatization of innovation routines does not defeat entrepreneurship, it co-opts it.

In capitalist doctrine, capital ultimately equates to technology. To invest capital is to invest in technology. Even Marx saw this.

If a meaningful capital investment in technology does not deliver a fair return to the true owners, managers have failed the firm and its investors. If not corrected, the firm should fail so that its capital can be redistributed by market forces to where it serves social interests better.

By law, managers of organized investor capital (e.g., publicly traded corporations) are responsible for the ongoing viability of the firm.

While the prioritization of stakeholders can vary, long-term business success depends mostly and most consistently on meeting the expectations of investors, called stockholders and/or shareholders.

Most firms serve many stakeholder groups that all might have an effect on how well a firm does, but the first and foremost management responsibility is fiduciary.

It is illegal for managers to make decisions that diverge from the stated interests of investors of capital. It is not a matter of ethics. It is the law.

Managers of capital and capital assets are the elemental agents of capitalism. Managers are capitalists.

This includes project managers whenever invested capital (e.g., depreciation) is directly involved.

The I in return on investment (ROI) refers to the true owners as investors, to whom managers owe a binding, legal, fiduciary responsibility.

This is how capitalism works.

Strategic Philosophy: Competitive Advantage Means Organization-Wide and Organization-Specific Superiority

A business strategy is the way an organization seeks to realize its vision and accomplish its mission. Creating and sustaining a competitive advantage should be the goal of every business strategist.

At the same time, the inescapable truth is that sustainable competitive advantage is very rarely seen, especially in technology-driven industries.

There is no such thing as a generic strategy, outside theoretical archetypes. There is no advantage to being generic. Any strategy should have a unique value-proposition. Otherwise, it cannot claim sustainable competitive advantage.

Perfect competition and pure monopoly are opposite and almost non-existent theoretical extremes. In between, lay all types and various degrees of monopoly power, even in an industry that seems highly competitive.

What an economist calls monopoly power, or market power, is a necessary condition for what a business strategist calls competitive advantage.

Monopoly/market power is an objective, non-normative economics term that describes any set of industry conditions that creates inherent industry profitability.

Competitive advantage is a values-based, normative management term—the business goal of garnering actual profit from profitability conditions in a superior and enduring way.

Monopoly/market power conditions must exist or firm-level profits and competitive advantage are competed to zero industry profitability (no possible competitive advantage).

Economic value added (EVA) is the best single measure of competitive advantage. EVA quantifies a firm's contribution to the growth of an economy at large.

Sustained and superior EVA relative to the competition and to industry profitability is the very measure of sustainable competitive advantage—this is how we know if it exists. Period

.

Industry-level economics alone does not fully explain why some firms have competitive advantage. We must look to internal resource heterogeneities among firms for defensible sources of uniqueness.

Moreover, we need to look for something that managers can actually manage first-hand. The resource-based view (RBV) of business strategy asserts that we need to identify firm-level and firm-specific characteristics—not product characteristics—that are

Value adding (in the economic definition);

Rare (enough to confer market power);

Difficult to imitate/copy (enough to confer market power); and

Difficult to obviate (invent-around; enough to confer market power).

Technology is first human-based competence. Technology is not the result of competence—technology is competence. Products are not technologies—products are artifacts or evidence of technological competence.

RBV asserts that competencies found at a low level of organizational analysis, plus other organizational resources/assets, combine into organization-wide capabilities and routines with the potential for firm-specific competitive advantage. For a capability to be sustainable, it must also be dynamic.

Accepting this reality is to also adopt the resource-based view of sustainable competitive advantage in strategic management because dynamic technological capabilities can be value adding, rare, and difficult to copy, imitate, or obviate.

Project ROI and business EVA are the most important measures/predictors of the success of a technology strategy for creating and/or sustaining a competitive advantage, because:

Capital Technology

Technology Knowledge

Knowledge Competency

Competency + Resources = Capability

An Adaptable Capability Dynamic Capability

Therefore: Capital Investment Dynamic Technology Capability

Sustainable Competitive Advantage, as measured by

Consistently Superior Economic Value Added

Returns to owners of capital

Perception of Superior Risk/Return Prospects

Low Cost of Capital

TRUE Sustainable Competitive Advantage

Virtuous Cycle of Investment and Returns

Contribution to GDP and Standard of Living

Technology: Technology Evolves in Cycles

Technology is knowledge, and knowledge is competence.

Technologies evolve in recognizable patterns called technology cycles that make them manageable. The lowest practical unit of analysis is the technology S-curve, a trace of how the growth of a technology accelerates with accumulated learning but then slows as it reaches a natural limit, or asymptote called its phenomenological limit. Phenomenological limits to technology S-curves cannot move or yield. Natural law will not break.

There is no such thing as a technological breakthrough—only discontinuities from one technology to another.

A radical discontinuity may be either competence-destroying or competence-enhancing at industry, value-chain, and/or firm levels of analyses—but not necessarily all at the same time or in the same way.

The appropriability (e.g., defensibility = profitability) of a technology is key to its potential for competitive advantage. Appropriability depends on the dynamics of knowledge transfer.

Codifiable knowledge can be put into words and be easily transferred throughout an organization—but it can just as easily be leaked.

Tacit knowledge cannot be put into words and this makes it easier to protect—but more difficult to learn organization-wide.

Tacit knowledge, then, is essential to creating and sustaining a competitive advantage. Any technology-related decision must consider the tacitness of the information = knowledge = technology = competence.

Markets: Products and Industries Evolve in Cycles

Consumers do not need products or technologies; they have needs, which are the problems/opportunities that technologies might satisfy.

The absolute and relative performance/price ratio of a product concept provides the most important insight about its adoption, diffusion, and evolution.

Technology will be more advantageously commercialized if a new product development (NPD) capability follows the nature of the types of consumers that will appear as the product life cycle evolves.

Product technology must co-evolve with process technology in order to produce a total product that can succeed in the marketplace.

Again, there is no such thing as a technological breakthrough. This is a heroic myth. Marketing breakthroughs occur when people become aware of a technology that has incrementally reached a degree and type of commercializability, and/or when technological discontinuities occur.

We can visualize an industry as a set of firms that compete for similar markets, based on performance/price substitutability, among technologically similar products.

Almost all industries subsume many products and their evolutionary product life cycles.

The evolution of any industry should consider institutional (government, commercial, etc.) markets prior to early consumer variants of the underlying technology. In some instances, we can view institutional markets comprising the real introduction phase of an industry life cycle.

Sometimes it is better to think of an industry as a competitive domain since this departs from static neo-classical economic analysis and is better suited to a dynamic Schumpeterian view of creative destruction.

Organization: Structure Follows Strategy

If the free market were perfect, there would be no economic justification for organizations, because the economic reason we organize is to affect economical value transactions.

The invisible hand of managerial choice tells us that there are significant costs of using free markets, simply because so many economic transactions are organized under rules of managerial fiat, or bureaucracy.

An organization is a nexus of contracts that balances costs and risks. Instruments such as job descriptions, enforced by organizational rules backed by statutes, are contracts too and the economics of contracts applies.

The costs of not organizing, of doing business across organizational boundaries, are called transaction costs. Where administrative costs are about equal to transaction costs, organizational boundaries appear.

Much of the cost of using an open market lies in managing risks of opportunistic behaviors. Managing the risk of possible opportunism is costly. All types of contracts are devices meant to balance the information needed to manage the risks of an economic relationship going wrong.

The rareness of complete, timely, riskless, and cost-free information—i.e., perfect information—is why we need contracts.

When managers follow these economic realities, they determine the structure of not only the internal value chain but also, external supply chain interfaces.

The nature of competition is shifting from the firm to the supply chain, where the firm is one portion of an overall value-adding system that competes with other value-adding chains, especially within the same industry.

When these architectures are fluid, morphing, evolving, and adapting quickly, the term competitive domain is better than traditional definitions of industry.

Disruptive innovations cause or can be caused by rapid changes to supply chain architectures. This is why they are called disruptive, regardless of the radicalness of the technology.

Bureaucracy is a badly abused and woefully misunderstood term.

Bureaucracy first asserts that the office, not the office holder, is the seat of authority.

The manager is an agent of this authority and the investor is the principal.

The manager is not an authority. Collectively, investors of capital are the authority.

Formal rules tie professional managers to investors’ interests.

Bureaucracies are efficient at what they do, mostly by enforcing standards called contracts—employment agreements regulated by authoritative rules that go by many names.

The correct strategic question is, are bureaucracies effective—do they accomplish the right thing(s)?

Are managers doing what investors have stated for them to do and governed by rules that are supposed to resolve principle-agent conflicts?

In the absence of any investor direction to the contrary, is EVA being maximized?

Bureaucracy is necessary for capitalism to work.

Project Management: A Dynamic Capability

A project is strategic if it has an effect on competitive advantage. Regardless of accounting practices in any given organization, we call these capital projects.

Capital projects primarily represent a risk taken with investors’ capital.

The stronger the link between a project and firm-level EVA, the greater the justification for using return on investment (ROI) as a project metric.

ROI hurdles imposed upon project managers should be determined through analysis of equally attractive investments in the total market for investments with similar financial risks.

A business case should explain how a capital project will contribute to value added (positive net present value (NPV) >0) where ROI>project hurdle/discount rate, and EVA above firm-level cost of capital.

Strategic-with-project management can appropriate the value of existing routines while systematically responding to encroaching rigidities.

Since technology = knowledge = competence, project management processes and areas of knowledge have the potential to be a dynamic capability.

…. but it's not ready yet.

Because each project is defined as a unique endeavor, each project is a unique set of resources and competencies—the holy grail of RBV and sustainable competitive advantage.

Every project management challenge is an opportunity for project managers to add value, as opposed to manage value added.

Managing trade-offs among project constraints is a value-adding competence. The value added of project managers is to optimize resource-driven, competency-based trade-offs among cost, scope, schedule, risk, quality, and other constraints.

Firm-level and firm-specific adaptation is necessary for project management best practices to become rare, difficult to copy, imitate, or obviate. Rigid application of external, institutional project management standards works against this.

A project management organization (PMO) should help create and then help manage a project portfolio for synergistic effects that will add value and increase overall EVA.

For a PMO to add value when managing a project portfolio, the PMO must itself, by managing itself, become or become a part of, an organization-wide dynamic capability.

A dynamic PMO must be a learning organization to be a center for knowledge management, knowledge management processes, and programmatic project management maturity.

A unique contribution of the book is suggested as the creation of a Project Knowledge Management Office (Project KMO):

A PMO managed as a dynamic capability with a core value-adding competence at managing codified and tacit knowledge for sustainable competitive advantage.

Global Project Management

Governance, not government, is the real organizational issue as it concerns global technology transfer and industrialization agendas.

Governments, corporations, quasi-governmental bodies, professional associations and trade groups, international standardization bodies, and even free markets subject to market discipline, are all governance mechanisms and ways of regulating trade at all levels of exchange.

This concept applies especially to the governance of intellectual capital, which is the key factor of production in the innovation process.

All managers in all organizations public and private must keep clear and distinct two concepts:

Comparative advantage among nations. Nations should not directly compete economically, that is the essence of mercantilism. Adam Smith (1776) in Wealth railed against that philosophy, but neo-mercantilism thrives still.

National comparative advantage is the result of creating advanced factors of production for firms to compete. Creating advanced factors of production is government's best economic role.

Innovation is the key industrial process that drives increasing national wealth. managers need to understand the appropriability characteristics of intellectual capital, or firm-specific knowledge.

Competitive advantage among firms. Firms, not nations, are proper units of economic competition.

Yet firms generally are not successful globally if they are weak at home. To be the best, firms need to compete with the best, continuously seeking out the toughest competition globally, never going back to being anything but world-class.

It does matter where technological innovation is managed. It should be managed where advanced/created factors of producing innovations are most productive.

Global project management crosses economic growth stages as well as political boundaries. Strategic and project managers must understand how philosophical ambitions and economic contexts differ.

Global projects are usually capital projects. The flow of capital in the global context follows the same principal as in the Industry context—it will always flow to the firm that serves it…best

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This book was written with practicing executives and project managers foremost in mind. A conundrum is that since strategies are oriented toward long-term results, it can take years for practical, empirically based theories to become reliable. For that reason alone, hot new theories that have yet to prove themselves are not always used in this book, in deference to theories that have proved robust. Most theories presented and discussed are classic, regardless of their age one way or the other. In the author's view, a classic only deserves the label if it has maintained its relevance to modern practice.

Finally, and in the same vein, as opposed to the academic practice of always citing original research articles, the author has cited books, scholarly articles, and textbooks that have been written by scholars and a few items from the popular press. This is the hope that the main readership will find something that triggers a desire to learn more by using the citations and the bibliography for the only thing they are really good for—diffusing knowledge.

PART I

Technological Innovation and Evolutionary Theories

If we economists were given less to wishful thinking and more to the observation of facts, doubts would immediately arise as [to] the realistic virtues of a theory that would have led [us] to expect a very different result. Nor is this all. As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the doors of the large concerns…and a shocking suspicion dawns upon us that big business may have had more to do with creating that standard of life than with keeping it down.

—Joseph Schumpeter, Capitalism, Socialism, and Democracy, 1976.

Overview

About one century ago, scholars started to take a systematic interest in how technological innovation happens. This was after the first hundred years of the Industrial Revolution had already occurred. By that time, the surge of technology was both wonderful and terrifying, spawning many myths and whole political-economic doctrines.

Since that time, investigating some of the most common myths has resulted in learning some of the most profound truths—even by a scholar or two that had a positive bias toward a myth in the first place. However, myths persist. The chapters in Part I do not directly attack them. In a sense that would be to legitimate their own fallacious thinking.

Many myths become popular because a few appealing anecdotes are improperly generalized as being typical or even universal. This is a classic error of logic called the inductive fallacy (Gula, 2007; Seay & Nuccetelli, 2007). We have known since the days of Aristotle that deductive reasoning is far superior to inductive reasoning. It is better to go to the effort to understand universal principles first, and then draw inferences about particular cases.

When we see what we think is a repeated pattern, we should look at what we think to be the causal relationships among the elements within the pattern, and only then make specific predictions for practical purposes. Therefore, our approach will be mostly deductive. Rather than point to one instance as typical and then attach superstitions that make it work, we will begin by examining broad patterns that have been empirically validated, and progressively deduce through closer inspection, conclusions that seem meaningful and practical.

Let us start somewhere in the middle of a myth and try to explain our way out of it. Many people, depending on their previous exposure as to how innovation happens, assume that causality most often runs from (a) investigation of how nature works, to (b) the creation of a technology, and (c) straight to selling it. From a few select or famous observations, we might induce from them that science comes first, then a technological invention results, and then consumers lap it up. In that case, technology would sit between science and consumption.

However, because so many new technologies obviously fail, there must be something else—another variable—to the overall connection from science to consumption. We will just call that something else, commercialization. The better model (Betz, 2003) often presented is

Science > Technology

> Invention + Commercialization = Innovation

As simple and appealing as this model seems, it is still flawed. First, observe that in the strictest sense, there is no single process variable called technological innovation—these are two separate and separated stages of the flow. Aside that illogic, things are not always linear, and that is the main problem.

For example, the Wright Brothers are credited with inventing the airplane, which we celebrate as occurring upon their first flight at Kitty Hawk, North Carolina, on 17 December 1903. This was considered a difficult task by the general public, and it was thought to be impossible by the best scientific minds of the day (Thurston, 2000). The science of that time said it was impossible and against the laws of nature.

Obviously, science that is more accurate followed the invention. Though we think it quaint that the Wright brothers constructed their gliders and flyers from spare bicycle parts, the truth is that the two were actually very, very good engineers who taught the best aerodynamicists of the time a thing or two. The first Wright Flyer was not the technology; the technology was all the learning that was in the minds of the two brothers. The airplane was the artifact, the evidence of the technology.

Yet despite the Wrights’ genius, the airplane was not an innovation for years to come. Commercialization followed later and then, largely because of the outbreak of World War I in 1914; i.e., the first successful market was military, not commercial. The next market was governmental—the contracting of airmail by the U.S. mail service to the U.S. Army. The next market was industrial, once delivering airmail became a profitable business. Entrepreneurs being what they are, technologies then improved—sometimes in little amounts and sometimes in leaps—that would allow carrying passengers as well as bulk mail, at a profit. Soon delivering people was more profitable then delivering. Commercial airlines happened. The rest of course, is history.

We can augment this view by suggesting that no technology can be successfully commercialized unless there is a demand for it already. Marketers assert that demand cannot be created—only discovered. Demand for a new technology may be conscious in a small number of people, which is called a market niche. More broadly, demand tends to be latent or not conscious in the masses. An immediate dilemma is that innovators cannot make much progress in a large latent market without first satisfying the needs of the attentive-but-very-different few. After all, we cannot identify what our latent demands are, or they would not be latent. We need information, often in the form of demonstration.

This tale contradicts several common myths, which will become evident later. Right now, the point is that if we are to develop the basis for a project-driven technology strategy, we must avoid myths and superstitions by first coming to understand generally repeated patterns.

The purpose of Part I is to first explain broad evolutionary patterns so that in subsequent parts of the book, we can draw managerial inferences and make practical suggestions. We will start from scratch and systematically explain what we think we know about the cyclical nature of how (capital-intense) technologies, products, and industries tend to evolve.

More than one definition of technology presents it as being the application of knowledge about how nature works (science) to a known problem or opportunity. Indeed, this understanding is more common in the technology management literature, than not!

As meant in this book, the word technology applies to all technologies in all products in all industries. We will never identify a technology industry. All industries have their own technologies based on every known natural science. While information technologies are for very good reasons very newsworthy, it is ironic for this reason that IT will be assumed endemic and necessary to all organizations in all industries. The correct strategic issue is not having superior information technology, but creating a superior and dynamic knowledge management capability.

On this idea, the book depends.

CHAPTER 1

Entrepreneurship and Technological Innovation

Introduction

Joseph Schumpeter

Entrepreneurship

Technology and Competence

The Locus of Innovation

Schumpeter and Project Management

Summary

Chapter 1 Takeaways

Questions for Discussion

Chapter 1 Appendix Entrepreneurship in Bureaucratic Settings

Introduction

This is not an economics book, but most of the reasoning is economic in nature. In the author's mind, several fields of economics have contributed the most powerful concepts for effectively managing business organizations.

REMEMBER

Economics is not really about money per se.

Economics is about understanding the nature of exchanges of things of value among parties.

Economics is one way to approach such exchanges logically and rationally.

We all know that modern business decisions are not always logical or rational, but using this kind of reasoning is a useful and practical way to go about developing a Project-Driven Technology Strategy. That is what economics is there for.

When the father of modern economics, Adam Smith, wrote his seminal work, he must not have been thinking of technological innovation (Rostow, 1994). For that matter, he was probably not thinking about technology at all. Although this happened over 200 years ago, we still do not have a complete economic theory of technology and innovation that takes into full account dynamics that should probably be taught to all students of economics – at least the Entrepreneurship majors.

Many are familiar with Adam Smith and are acquainted with his work The Wealth of Nations, which was published in 1776. Smith and this work coined the term invisible hand to hypothesize that unrestricted commerce, guided only by countless small decisions made by the many, would yield optimal economic results.

What most people do not know is that none of this had anything to do with the American Revolution, or the American colonies in general. Smith, who was Scottish, focused on Great Britain and the situation that European countries had created not only in Europe but also on the continually expanding world scene. Noting miserable living conditions mostly in England, Smith felt that mercantilism had had its day.

For hundreds of years, the prevailing economic philosophy (Lekachman, 1959) held that wealth was a finite commodity. That is, any wealth that one country had was wealth that another country did not have, at least at any given point in time. Logical enough perhaps, but it also meant that for any nation to increase its wealth, it had to be done at the expense of at least one other nation. The final measure of a nation's wealth was gold, which was in finite supply. Naturally, this made all nations potential enemies, and eventually led to what was probably inevitable—colonialism, imperialism, and endless wars.

Many scholars since Smith's time have shown that if nations are allowed to trade with relative freedom, they will come to focus on what they produce most efficiently. They will then trade their surplus production in a narrow range of commodities for the surpluses of other countries, to result in an ever-increasing expansion of wealth. In other words, despite the finite characteristics of gold, true wealth was really something else and could be grown for all without limit.

Today meaningful measures of progress are growth in productivity, gross domestic product, and standard of living, causally, in that order (Porter, 1990). This reflects what is called the theory of comparative advantage. Any given nation does or does not have a comparative advantage relative to other nations. As we will see throughout this book, however, national comparative advantage is not the same as firm-level competitive advantage. We will start that discussion soon enough.

What makes Adam Smith the father of modern economics is not so much the fuss concerning the invisible hand, but the beginning of the destruction of mercantilism. Mercantilism has not vanished by any means, though some of its advocates eschew the word. Neomercantilist economic instincts and policies are all around us, seen in trade barriers, restrictions to labor mobility, and other instruments that implicitly assert that wealth is a finite commodity—what's mine is mine and hopefully soon, what's yours is mine too.

These instincts do not reflect the spirit of the entrepreneur in a capitalist system, entrepreneurship as an economic phenomenon, and technological innovation as the most important contribution to the growth of firms, industries, and economies. We will inspect this more closely. For now, let us agree that wealth is not finite—that the total amount can always be expanded, improving the lot of firms and the local communities they serve, investors, consumers, workers, economies, and nations.

However, we need a new unit of economic exchange to observe how growth happens, how wealth is created, and how things flow in the systems we have institutionalized. The new gold is—knowledge.

Joseph Schumpeter

Entrepreneurship. In 1942, economist Joseph Schumpeter, pronounced shoom-PAY-ter (1976) articulated a basic view of economic growth that grappled with a problem that had perplexed economists since Adam Smith: how to consider technological change as an endogenous variable in a model of macroeconomic development (Rostow, 1990).

Here, endogenous refers to whether or not technological change is itself considered to be a variable in a model of macroeconomic theory. An endogenous variable is one that is considered within the boundary of a theory, though it may or may not necessarily be an independent or dependent variable. In fact, it could be a theoretical constant—but least it is in the model.

Exogenous means that technological change would be external to a theory. It is neither an independent nor dependent variable in the model—it simply is not considered, at least not directly. Of keen interest to us is that an exogenous variable is something that cannot be managed. For the most part, it is either assumed or ignored.

Classical and neoclassical economics have changed over time, but not to the extent or in the way we need. Schumpeterian economics, the Austrian School, or evolutionary economics has not enjoyed the amount of development that classical economics has, but is one that we will refer to, to help explain ideas that we must depend on.

First, we should place Joseph Schumpeter's thinking in its proper context. Many people have heard of Schumpeter, but labor under a complete misunderstanding of his contributions.

In 1776, Adam Smith did his best to smash the underpinnings of Mercantilism. His thoughts preceded the dawn of the Industrial Revolution by a few decades. But just as Smith developed his theory when living in and observing 18th-century England, Karl Marx also developed his thoughts while living in 19th-century England—not Russia. In 1848, only a few decades after the invention of the steam engine by James Watt from Scotland, Marx and Engels recorded the following thoughts in the Communist Manifesto (all italics have been added):

The bourgeoisie [later called capitalists] cannot exist without constantly revolutionizing the instruments of production, and thereby the relations of production, and with them the whole relations of society…. Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the [capitalist] epoch from all earlier ones…

All old-established national industries have been destroyed or are daily being destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilized nations, by industries that no longer work up indigenous raw material, but raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe. In the place of old wants, satisfied by production of the country, we find new wants, requiring for their satisfaction the production of distant lands and climes. In place of the old local and national self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations. As in material, so also in intellection production. The intellectual creations of individuals become common property. National one-sidedness and narrow-mindedness become more and more impossible…

The [capitalists], by the rapid improvement of production, by the immensely facilitated means of communication, draws all nations, even the most barbarian, into civilization. The cheap prices of its commodities are the heavy artillery with which it batters down Chinese walls, with which it forces the barbarians’ intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the [capitalist] mode of production; it compels them to introduce what it calls civilization into their midst, i.e., to become [capitalist] themselves. In a word, it creates a world after its own image…

The history of industry and commerce is but the history of revolt of modern productive forces against modern means of production…

What the [capitalist] therefore produces, above all, are its own grave-diggers. Its fall and the victory of the proletariat are equally inevitable" (Marx & Engels, 1848, as reprinted 1986, pp. 12–13).

In other words, Marx saw all of history as being a perennial class struggle between laborers and owners. In the most recent struggle of that day, the expropriation that worried him was the replacement of workers by the means of production evermore owned by the capitalists; that is, pooled capital of the monetary kind was used to purchase capital equipment of the technological kind. Marx thought this would cause an ever-increasing degree of technological unemployment where the proletariat would finally be fed up and throw away their chains.

In the early decades of the 20th century, in the United States, Joseph Schumpeter chanced to differ with Marx's interpretations, remarkably prescient they may have been for that time. He felt that a key dynamic that Marx did not foresee by 1848 was the powerful engine of technological innovation and more to the point, its intellectual essence. While lionizing the impact of the individual entrepreneur, Schumpeter asserted that technological innovation is the very engine of capitalism's constant rejuvenation. He noted that economic equilibriums are always being displaced by incremental changes in existing technologies and, more famously, by spontaneous and discontinuous innovations.

This latter dynamic he described as creative destruction, a term which has since become common and which has received significant empirical support (Fellner, 1970; Freeman, 1994; Nelson, 1993; Rothwell, 1994; Schmookler, 1965; Solow, 1957; Steinmueller, 1994):

Creative Destruction is the essential fact of capitalism…[capitalism] cannot be understood irrespective of it, or, in fact, on the hypothesis that there is a perennial lull…the problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them. (Schumpeter, 1976, pp. 83–84)

However, in his time, Schumpeter's work fell short of being a full theory, and despite important progress made by other scholars, mainstream economics has generally maintained its dependence on classical and neoclassical economic models that assume equilibration (classic supply and demand analysis), not creative destruction (Carlsson, 1994; Freeman, 1994; Lissoni & Metcalfe, 1994; Rostow, 1994).

This suggests a partial explanation of why the study of strategic management (which depends on economics in great part) has for much of its existence, maintained a similar view of technological change. In frameworks such as the five forces model and the resource-based view, technology is often an important focus as implied by variables such as intellectual proprietary rights and the appropriation of rents to innovation. However, underlying economic assumptions about equilibration are generally mainstream, not Schumpeterian strictly speaking. Implications are largely concerned with managing growth, maturation, and decline—not proactive recreation (Hayes & Wheelwright, 1988; Howard & Moore, 1988; Moore, 1988; von Hippel, 1988).

Schumpeter's focus has not gone unnoticed in strategic management, however:

Mainstream economics always held back on the role of the leader. It preferred the abstraction of the competitive market and the predictability of the skeletal leader to the vagaries of strategic vision and the innovative market niche. (Mintzberg, 1994)

In other words, though we should champion the entrepreneur as opposed to the steward, there remains theoretical problems since Schumpeter's time:

To undertake such new things is difficult and constitutes a distinct economic function, first, because they lie outside of the routine tasks which everybody understands and, secondly, because the environment resists in many ways…To act with confidence beyond the range of familiar beacons and to overcome that resistance requires aptitudes that are present in only a small fraction of the population and that defines the entrepreneurial type as well as the entrepreneurial function. (Schumpeter, 1976, p. 132).

REMEMBER

Entrepreneurship is an economic phenomenon.

Entrepreneurship is the phenomenon

…not the type of organization…

that is the essence of Capitalism

The words entrepreneur and entrepreneurship are on the par with theoretical concepts like perfect competition and monopoly. Entrepreneurship is the force that challenges and shakes up the other forces that classical economics say move an economy towards equilibrium—those being supply and demand.

Neoclassical economics asserts that equilibrium is a wonderful thing, because at that point maximum economic efficiency is achieved. But Schumpeter pointed out that if things stay at equilibrium for long, they stagnate. If economic/business decisions are made rationally by the mythical economic optimizer, supply will eventually equal demand at a stable but static intersection.

Schumpeter asserted that irrational decision makers, taking economically suboptimal risks—i.e., making decisions that would not appear advisable from the results of financial planning and market research—that comprise the phenomenon that is the gales of creative destruction that keep things from equilibrating in the long term. He felt that this was the very essence of capitalism—despite the reality that the majority of economically irrational decisions would fail.

REMEMBER

The Schumpeterian entrepreneur is the theoretically economically irrational agent of the force called entrepreneurship.

Anybody can be an entrepreneur, and any organization can be entrepreneurial.

In reality, entrepreneurship happens by virtue of the worldviews, attitude, and consequent behaviors of the entrepreneur, whether or not this person works in a small business or large, new business or old. See the chapter appendix for an expression of Schumpeter and associated misunderstandings of his views.

Nowhere in the scholarly literature is it professed that technology and technological change are unimportant. The point is that it has been difficult for a true technology strategy theory to develop in a way that would fully satisfy the field of strategic management. However, that does not mean that there has been no progress, and much of