Enterpreneurship, growth and adaptive capabilities

Context

Most would agree that entrepreneurially oriented firms—being innovative, entering new markets, and taking risk—grow faster. But how a firm becomes entrepreneurial is a complicated question.

This paper posits adaptive capability as a mechanism through which a firm's prior growth influences the exhibition of future entrepreneurial action. Defined as the firm's proficiency in altering its understanding of market expectations, increased adaptive capability is a consequence of the new resource combinations that result from expanding organizational boundaries. Increased adaptive capability in turn corresponds to expansion of entrepreneurial activity, as firms increase their entrepreneurial orientation as the strategic mechanism to capitalize on their improved understanding of market conditions.

Results

The researchers found support for growth contributing to a firm's entrepreneurial orientation. But between growth and being more entrepreneurial is the firm's ability to recognize changes in market expectations. As a firm grows, it acquires new resources and new knowledge of how to use those resources. These new resource combinations increase its ability to recognize changes in market expectations—its adaptive capability.

Relevance

To capture entrepreneurial opportunities and prevent growth from becoming an obstacle instead of a vehicle to increasing innovation, growing firms (must) deploy their adaptive capability.

Reference

Eshima, Y and Anderson, B. Firm growth, adaptive capability, and entrepreneurial orientation.  Strategic Management Journal, 38: 770–779 (2017). https://onlinelibrary-wiley-com.proxy-ub.rug.nl/doi/abs/10.1002/smj.2532.

Expert Opinion Gérard Brockhoff

The research supports the idea that a firm’s growth direction in turn determines its entrepreneurial orientation. As a company grows, it acquires new resources and learns how to leverage on these resources. These resource combinations increase the firm’s ability to recognize changing market expectations—its adaptive capability.

The research touches upon an important strategic notion. In practice, this mechanism probably applies to many companies as businesses progressively focus on adapting to market developments through a more external, outside-in entrepreneurial approach based on customers, competitors and partners. The awareness of adaptive capability is gaining importance amongst (non-executive) directors and shareholders as markets are getting more volatile and dynamic and innovation has become a core strategic theme. Companies also tend to gradually seek adjacent, related growth paths in a more experimental, learning curve based on acquired skills and assets in the existing business to leverage on the core activities and limit risks. Arguably, firms in the most volatile, dynamic markets are trying to adapt to the market environment the most whereas companies in more stable, traditional markets are likely to mostly pursue a more intrinsic, inside-out growth strategy. A critical note would be that other factors may push adaptive capability and entrepreneurial orientation. Apart from market dynamics, in practice relevant factors may include the competition and market maturity level as well as the governance and shareholding structure. For instance, family businesses and public organizations in largely traditional, domestic sectors tend to follow a more intrinsic, incremental growth strategy by nature.

In most businesses, adaptive capability is relevant. A company that ignores market adaptation as a core capability faces the risk to gradually weaken its innovation funnel and market position and to erode its financial performance over the years. In practice, an important reason of underperformance and financial distress of companies tends to be lack of persistent market and product development and organizational inertia to renew businesses. Firms may increase its adaptive capability by putting more weight on the disciplines of marketing and R&D in both their core processes and management model and by consistently investing in new, emerging markets and technologies related to the core business in addition to their regular, traditional resource allocation with investments. Additionally, companies acquire new resources by the acquisition of startup’s such as in the pharmaceutical, electronic and financial industry. It would be interesting to research if companies that persistently invest more in marketing, R&D or acquisitions stand out in their adaptive capabilities in their sector.

As an illustration of adaptive capabilities, a wholesale company decided to gradually transform its IT architecture to be able to advance trading, ordering and support for customers across markets and to create a competitive, digital advantage in the industry. Key to the digital transformation were the standardization of various ERP and CRM applications, the step-by-step  migration to a (public) cloud environment, and a more business-driven, agile-based organization model with multi-disciplinary, autonomous innovation teams led by business managers in various countries reporting directly to the board. Initially, the transformation was primarily driven by the business need to automate and improve customer and logistic operations, however, the innovation teams quickly learned new, additional ways to service customers digitally and to develop new business–in new market channels as well as in new service models. Moreover, based on the new IT platform, the company decided to invest in a new online business-to-business auction model that could cannibalize its traditional business in the future. Other ideas include a broader product range as well as bundled products or integrated solutions.

References

Examples of growth as well as turnaround cases to illustrate principles of Dutch high-performers can be found in G. Brockhoff, Witte raven: Succesvol ondernemen in Nederland in turbulente tijden, Van Gorcum, 2013. For cases, also see adstrat.

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