Enterprise and Small Business Principles

The exploitation process

Unless perhaps when the exploitation of the business idea consists of a one-off outright sale to another organisation, exploitation, like discovery, is a process. It evolves over time. As used here the concept of exploitation carries none of the negative connotations it has in certain other contexts. Neither does the term exploitation as used here neces­sarily imply success. What is being referred to is, simply, the attempted realisation of the value creation and appropriation potentials of the business idea.

Obviously, no entrepreneurial process is complete without exploitation. No matter how smart or revolutionary the ideas, no value is going to be created until someone acts upon them. Exploitation activities make the start-up effort tangible (Carter et al., 1996) and stakeholders committed to it (Van der Veen and Wakkee, 2004). In Table 7.1 the cornerstones or process steps discussed above have been listed and commented upon as regards how they relate to discovery and exploitation, respectively. There are many ways one can, on this basis, summarise what exploitation entails. One way of making sense of the entries in the table is to emphasise the following, partly overlap­ping categories:

■ Efforts to legitimise the start-up, such as creating a legal entity, obtaining permits and licences, developing a working prototype of the product and developing rela­tions with various stakeholders.

■ Efforts to acquire resources, such as core group expertise, financial capital, intellec­tual property, and other inputs.

■ Efforts to combine and coordinate these resources through the creation of a func­tional organisation.

■ Efforts to generate demand through marketing and the development of customer relations.

While all of the above are important, it may be argued that for the long-term success of an independent start-up the most critical aspect of the exploitation process is to

obtain resources and resource combinations that are valuable, rare and imperfectly imitable (Barney, 1997), thus providing some ‘isolating mechanism’ (Rumelt, 1991).

The implementation of these elements of the exploitation process seems rational and textbook-like enough. And often it is, for example when the founder is an experienced habitual entrepreneur setting up yet another venture in a mature industry (e. g. a new up-market restaurant) and/or when the start-up is backed with formal venture capital and the external control that follows. In other cases, however, the execution of these exploitation behaviours does not look textbook-like at all - and that is not necessarily a bad thing. As start-ups are often resource-starved they need to find smart and frugal ways to get ahead. As a bonus, these approaches are often impossible for large, estab­lished competitors to copy. Some examples are as follows:

In order to reach her target group Carin Lindahl, the inventor of the sports bra, used an annual all-women running event that attracted some 15,000 participants. Early in the morn­ing Carin and her friends broke into (without damaging, of course) all the mobile toilets that were set up for the event, and applied posters advertising the product on the inside of the doors. After the runners reached the finish line (although not immediately at it, where only official, paying sponsors could operate) they were handed a leaflet with further information. In order to get stores to carry the product Carin would visit them and show the product’s functionality through a very intense and unforgettable workout session in front of the astonished shopkeepers. She would also send family and friends to the stores to ask for the product. In case they carried it they would ask for a different colour. When she needed a (thin) product catalogue she used herself and friends, among them a personal friend who hap­pened to also be one of Sweden’s most famous stage artists, as models and endorsers, and in addition she shot many of the pictures herself. In order to expand her product assortment she needed to cultivate other relations within the industry. The way she did this was to invest most of the first year’s profits (which were short of £1,000 anyway) in a high quality coffee machine, and offer free coffee to fellow exhibitors at trade fairs (this was before the global Italian coffee revolution and really good coffee was a rare find in this type of context). This way she got to know ‘everyone important’ in the industry. (Lindahl, personal communica­tion; Lindahl and Skagegard, 1998).

As regards Nantucket Nectars, and again in Tom Scott’s own words: ‘We started making it fresh and sold it off our boat and out of a little storefront we’d opened. We figured out a way to get the product into recycled wine bottles. Through this period we made money off every­thing but our boat business. We were doing anything else on the side: painting houses, bar­tending. Sometimes I lived in my car; other times I lived in a group house where the heat was never turned on. In terms of making the business work financially, what we did was pay our bills slowly, collect our receivables as fast as possible, and pay ourselves nothing. That’s how you finance a business. . . We found that being young was an advantage, too: no wives, no kids, no mortgages, no responsibilities. If we wanted to work 14 hours a day, we did; if we didn’t have money for clothes, it was OK - we didn’t need clothes. We didn’t need a car. Also, when we went into the factories, when we met with distributors, there was definitely a sense that, Hey, here’s a couple of young kids - give ’em a break. . . [W]e made the juice the way we liked it, and we didn’t worry about the other stuff. We just sold it. Then we started con­sidering mass production, and the factories told us, “You can’t use that bottle. You’re going to have to use high-fructose corn syrup, not cane sugar,” and on and on. Now I see why the other juice companies are the way they are - the factories don’t want to handle the business differently. Thankfully, we were stubborn. We didn’t want to compromise our product just because the factory said so. Anybody who knew something we didn’t know about the juice

or beverage business, we studied like a hawk. The business isn’t high tech, although it’s more complicated than people realise - or than we realised at the time. But it’s learnable. People always ask, “How did you learn about those factories and all that?” You just do it. You make a lot of mistakes in the process. Nantucket Nectars is one big collection of mistakes. The fear of production, the fear of getting things mass-produced, is unfounded. Ultimately, Tom and I just operated from the shared belief that there are no rules in life; there are laws, there are ethics, but there aren’t any rules. You don’t have to make juice with high-fructose corn syrups, no matter how many people say that you do.’ (Scott, 1998)

In many cases, however, capturing and sustaining a strong position in the market is a very difficult task for a new firm lacking resources and track record (Aldrich and Auster, 1986). More generally, regardless of where they originate, some business ideas are bet­ter exploited by independent start-ups while others fit better in existing organisations. This highlights the importance of mode of exploitation (Shane and Venkataraman, 2001). Combining the possibilities of discovery and exploitation by independent individual(s) and members of existing corporations yields the four cases outlined in Figure 7.1.

Although Shane and Eckhardt (2003) emphasise that sufficient research-based know­ledge about the prevalence and success rates of these cases does not yet exist, it is pos­sible to exercise informed speculation about the fit between type of idea and exploitation mode. The four cases are as follows.

Case one

This concerns discovery as well as exploitation by independent individuals; the inde­pendent start-up mode. Certain structural characteristics of small or emergent organisa­tions give them discovery advantages (Acs and Audretsch, 1990; Arrow, 1983; Barker and Gump, 1964), but that does not necessarily make them the best vehicles for

Figure 7.1 Locus of discovery and locus of exploitation

exploitation as well. It is likely that business ideas that originate outside corporate con­texts can also be successfully exploited as independent start-ups when: a) development costs are not prohibitive and small-scale production is economically feasible; b) the potential market is not large enough to attract large actors; c) existing firms cannot use their existing resource base to exploit the idea in a superior manner; d) the new firm can successfully develop resources and resource combinations that are difficult to copy, i. e. create sustainable competitive advantage (Barney, 1991; 1997); and/or e) the new firm is able to stay ahead of the competition through continuous innovation.

Case two

This concerns both discovery and exploitation within a corporate context - the cor­porate venturing mode. This mode is particularly likely for incremental innovations that leverage established firms’ existing knowledge-base, production technology and distri­bution networks. It is also a possibility for radical innovations that require substantial development costs and/or a combination of several highly specialised competencies that already exist in the firm and/or its network.

Case three

This concerns discovery within an existing corporation and exploitation by an inde­pendent start-up: the spin-off mode. This is likely when the new business idea, although it originated within the firm, does not make good use of the firms’ existing resources and capabilities. As observed by Kogut and Zander (1992), when firms depart from their knowledge base their success probability approaches that of an independent start-up. In fact, for radical innovations the existing knowledge base and organisational routines can be liabilities relative to an independent start-up (Anderson and Tushman, 1990; Henderson and Clark, 1990). Another spin-off reason is that the new initiative addresses a small market niche (Christensen and Bower, 1996). Finally, referring to Bankman and Gilson (1999), Shane and Eckhardt (2003) observe that risk-taking propensity and other characteristics of the discoverer also influence whether an idea originating in a corporate context will be commercialised within the corporation, as a spin-off, or not at all.

Case four

This concerns discovery by independent individual(s) and exploitation by established corporations: the acquisition mode of exploitation. As a mirror image of the independ­ent start-up case this is the likely path when development and/or small-scale produc­tion costs are prohibitive for a small firm, the potential market is large, and existing firms can use their existing resource bases to exploit the idea. The relation to intellec­tual property rights is not clear cut. Without such rights the originators would not have much to sell and might just as well try to go it alone. So it is rather in possession of such rights they have an incentive to make the transfer happen. On the other hand, when the concept is promising and not protected, the large actor can easily outmanoeuvre the small actor, with or without acquisition. The independent discoverer thus faces the ‘prospector’s paradox’ (Alvarez and Barney, 2004) and may have to develop some other basis for sustainable competitive advantage - or give up. A final reason for transfer from independent to corporate context would be that the individual(s) involved do(es) not feel motivated or able to exploit the idea. For example, academic researchers whose research has commercial potential may not want to switch to a business career. Through licensing or outright sale they may still reap some of the financial benefit of their discoveries.

Further examples

In order to further illustrate the mode-of-exploitation problem, consider the following examples:

The Solar Mower - a solar powered robotic lawn mower that uses random walk computer software and magnetic cord demarcations to walk and cut the garden little by little, like a modern sheep - was invented by an independent Belgian inventor who happened to have special competence within both of the two main technologies concerned. This is a radical innovation, unlikely to originate in an existing lawn mower manufacturing company (and reputedly a doomed one in the UK because it does not make stripes!). But think of the enorm­ous hurdles this innovator would face in development costs, acquiring or ascertaining reli­able production capacity for this new combination of technologies, building awareness about the product and confidence in the new brand, and getting into the available distribution chan­nels without prior connections or proof of profitable demand. Wisely, the inventor decided to sell the idea to Husqvarna, an internationally established lawn mower manufacturer, and as the technology was new to them the company wisely decided to employ the inventor. However, the product never took off in a big way presumably because it did not make much use of Husqvarna’s capabilities other than its brand name and distribution network. Apparently in an effort to bring it closer to the family, the Solar Mower became the Automower, without solar cells but with an ability to find its way back to the recharging pit when needed. Another problem remained, though: the risk of cannibalisation on Husqvarna’s other lawn mower lines if the product achieved great success. Presumably in an effort to over­come this problem the Automower has recently been transferred to the Electrolux brand (within the same corporation) where it enjoys similar benefits of strong brand name and dis­tribution, but without in-house competition with other technologies. As a bonus Electrolux got a cousin to its robotic vacuum cleaner, which was developed on the basis of a very similar idea and with some technological overlap as well (Bjenning and Bjarsvik, 1999; Davidsson, 1994; Electrolux, 2004).

When you think of it, the sports bra could very well have originated within an existing underwear or sportswear manufacturer. You could even argue it should. But they failed to see this opportunity before Carin Lindahl did. Not only that, some established firms got the chance but refused to take it when Carin suggested they pick it up. Once she had proven the viability of the concept, however, it was very difficult for Carin to establish a sustainable competitive advantage. The manufacturer of the fabric had no reason to give her exclusive rights; the idea was not patentable, and industrial design protection would have been very easy to circumvent. Consequently, the big actors marched in and captured most of the world market. Through emphases on quality, differentiation and brand extension Carin has been able to build and sustain a healthy small business (called Stay In Place, as it were), but most of the value her idea created has been appropriated by other actors (Lindahl, personal com­munication; Lindahl and Skagegard, 1998).

These examples do not exclude the possibility that independent start-ups can success­fully exploit opportunities and grow large in their own right. IKEA, McDonald’s and

Starbuck’s are spectacular examples of ideas that did not seem (initially) very difficult to copy; yet they managed to both create and appropriate enormous value out of seem­ingly simple ideas. Over time they have, of course, built brand equity, tacit knowledge, casual ambiguity and super-efficient business systems that now make them very diffi­cult to challenge for an imitator.