Entrepreneurial round-tripping: The benefits of newness and smallness in multi-directional value creation

The purpose of this paper is to develop and empirically test the theory that new industry entrants hold advantages over incumbents in the shift from unidirectional to multi-directional revenue streams.

Using a Cobb-Douglas production function, modified to isolate returns to innovation, the authors examine data from three separate contexts: steamships on Western US rivers (1810-1860), satellite-based internet services (1962-2010) and food waste recycling (1995-2015).

The results reveal that while incumbents often attempt to stretch existing technologies to fit emerging circumstances, entrepreneurial innovators achieve greater success by approaching multi-directional value creation as a distinct challenge, one requiring new technologies, organizational forms and business models. Existing theories have primarily attributed incumb ent inertia to a firm’s inability perceive and pursue radical innovations, the results also suggest that existing firms are unwilling to pursue innovations that are likely to erode the marginal profitability of their respective business models. Ironically, rather than protecting incumbents’ financial interests, the authors find that “marginal reasoning” can lead to diminished performance and even extinction.

The proposed framework and empirical findings have implications for numerous multi-directional frontiers, including: social networking, commercial space travel, distance education and medical treatments using nanoscale technologies.

While incumbents often lament the destabilizing effects of multi-directionality, new and small firms enjoy a compelling array of entry points and opportunities.

Scholars, incumbent firms and start-ups both benefit from insights stemming from the novel formulation of multi-directionality challenges and opportunities.