How corporate entrepreneurs learn from fledgling innovation initiatives: cognition and the development of a termination script

Entrepreneurship: Theory and Practice, Nov, 2007 by Andrew C. Corbett, Heidi M. Neck, Dawn R. DeTienne

Through a parallel examination of literatures on new product development termination and entrepreneurial cognition, this study explores a specific form of human capital development: learning from failure. Specifically we advance the literature on entrepreneurial human capital by linking cognitive scripts used by corporate entrepreneurs in project termination decisions to corresponding levels of learning. Our longitudinal investigation of technology-based firms suggests that corporate entrepreneurs use three types of termination scripts: (1) undisciplined termination, (2) strategic termination, and (3) innovation drift. We illustrate the presence of each script and analyze learning implications during innovation projects (action learning) and after termination (post-performance learning). Based on our analysis we suggest that organizational learning is dependent upon the type of termination script individuals employ.

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Because of the strong impact that new product development has on the organization, the decision to proceed with or terminate a product development initiative is one of the most important but difficult decisions in corporate entrepreneurship (Balachandra, 1984; Green, Welsh, & Dehler, 2003). Product development initiatives may be ended too quickly, resulting in unrealized potential, or may be held on for too long, resulting in prolonged commitment to a losing course of action. This importance is underscored by the fact that failed new ventures can constrain a company's resources for decades and cost hundreds of millions of dollars (Balachandra, 1984; Boulding, Morgan, & Staelin, 1997; Royer, 2003).

In addition, a large percentage--between 25% and 35% (Boulding et al., 1997)--of new product development efforts end in failure. In a 4-year study of new product development at Nokia, McGrath, Keil, and Tukiainen (2006) found that 70% of corporate venturing investments from 1998 to 2002 were either discontinued or completely divested. In response, there is an emerging research stream that focuses upon learning from failure (McGrath, 1999; McGrath et al. ; Minniti & Bygrave, 2001; Shepherd, 2003; Sitkin, 1992). It has been suggested that failure, specifically in the context of new product development and corporate entrepreneurship, provides valuable learning opportunities such as a greater emphasis on innovation processes, increased search for solutions, additional motivation for adaptation, greater attention to information processing, an increased risk tolerance, and greater experimentation (McGrath, 1999; Sitkin, 1992). However, we know very little about how corporate entrepreneurs make termination decisions and how they capitalize upon the potential learning from these failed initiatives.

To facilitate understanding, we turn to a cognitive perspective. In entrepreneurship, the cognitive perspective has gained strength over the past decade because it demonstrates the importance of an individual's knowledge structures to judgments and decisions involving opportunity evaluation, venture creation, and the successful growth of new ventures (Mitchell et al., 2002). The cognitive perspective is especially applicable to learning from failure, as the literature has shown that entrepreneurs are more likely to engage in decision-making biases and heuristics such as counterfactual thinking; attribution of positive outcomes to internal causes and negative outcomes to external causes; underestimation of the time required to complete a project; and self-justification for escalation of commitment (Baron, 1998; Busenitz & Barney, 1997; Forbes, 2005; Shaver, Gartner, Crosby, Bakalarova, & Gatewood, 2001; Staw, 1981). Of particular relevance to the study of failure is the research on cognitive scripts--the process of ordered mental steps pertinent to a particular action, activity, or field of interest (Read, 1987)--because scripts provide a theoretical framework from which to organize the seemingly disparate decisions made by corporate entrepreneurs (Mitchell, Smith, Seawright, & Morse, 2000).

In this study we explore the intersection between new product development failures and entrepreneurial cognition in order to acquire a deeper understanding of the processes associated with project termination and the resulting actions that may lead to increased organizational learning. As such, and as part of a larger research program that investigated how large corporations could build a sustainable capability for developing innovative new ventures, we explored the cognitive scripts used by corporate entrepreneurs to terminate failing new product development ventures. Additionally, we illustrate the presence of each script and analyze learning implications.

We focus on the role of the corporate entrepreneurs because corporate entrepreneurs are seen as critically important to the innovation process (Brown & Eisenhardt, 1995; Cooper, Edgett, & Kleinschmidt, 1999) as they make strategic choices concerning which markets to invest in, which projects to select, and how to allocate resources (Cooper et al.). In addition, the cognitions of the lead entrepreneur strongly affect the organization's belief about new product development (Royer, 2003).