Entrepreneurial innovation

Hamid Houshmand

Example of Entrepreneurial Innovations

• Starting up a restaurant is an entrepreneurship• However, McDonald was entrepreneurial

innovation _ a non-techno innovation.• Some call it entrepreneurial management

innovation or entrepreneurial innovation• Standardizing the product, designing process

and tools, and creating new market• Another example: Marks and Spencer in Britain,

and GE in US

Definition of Entrepreneurial Innovation

• The entrepreneur starts his own, new and small business. The innovative entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield

• Historically: Credit Mobiler in France and Deutsche Bank in Germany and later J. P. Morgan in USA in 1860-70 were banks aimed to mobilize others’ money to areas of higher productivity and greater yield.

• Basically: Entrepreneurs take risks and need to make decision in uncertainty.

Managerial Innovation

• Mainstream economic theory to this day:– Focus on existing resources – The supply and demand equilibrium– Classic economics strive to optimize existing resources– Incompatible with entrepreneurship – Karl Marx did recognize the power of technology, but failed

to recognize the entrepreneurial potentials– Marx saw everything beyond the optimization of present

resources, that is establishment of equilibrium, is the result of changes in property and power relation ships, and hence “politics” which places it outside the economic system itself

Managerial Innovation

• Joseph Schumpter first saw the managerial potential in his work: The theory of economic dynamics

• He said: the dynamic disequilibrium brought on by the innovating entrepreneurs rather than equilibrium and optimization is the norm of a healthy economy

• Entrepreneur always searches for changes, respond to it, and exploits it as an opportunity

• The high risk of high tech business can also be managed by being systematic and being based on purposeful innovation

Innovative opportunity • No purchasing power of US farmers in early 1900, turned to

purchasing of harvesting machines through innovative Installment buying

• Installment buying transformed economy: changed from supply-driven to demand-driven

• Moving a truck body off its wheels and onto a cargo vessel (Container) Quadrupled the productivity of see transport and saved shipping

• Social innovations such as newspapers and insurance had much greater impact than any techno innovation

• Management of productive people of different skills and knowledge working together in an organization is an innovation of 20th century

Japanese Way of Innovation

• Imitating• Importing • Adopting other people’s technology• Social innovation: changing the value obtained

from the resources by the customer • Focus on demand rather than on supply

Sources for Systematic Innovation

• Purposeful and organized search for change • Monitoring seven sources for opportunities– The unexpected event: success, failure – Incongruity: There are several kinds of incongruity– Process need– Changes in industry and/or market structure– Demographics– Changes in public perception, mood, and meaning– New knowledge, both scientific and non-scientific

Unexpected Success

• Unexpected success is a symptom• The underlying phenomenon may be nothing more

than a limitation on our vision, knowledge, and understanding

• To exploit the opportunity for innovation offered by unexpected success require analysis

• Example: rejecting success of marketing new drugs in the animal market by a pharmaceutical company

• Often unexpected success demands innovation rather than being a opportunity for innovation

Unexpected Failure

• Unexpected failure demands that you go out, look around, and listen

• A symptom of an innovative opportunity• Example: Repurchase guarantee to first-time

homebuyer after failure of marketing their new built homes

• Failure of Ford resulted in segmentation of American car market in 1920s: low, lower middle, upper-middle, and upper segments

Unexpected Outside Event

• Example: When TV appeared in fifties dramatically reduced book-reading resulting in changes of the publish industry

• The reaction: Publishers started department stores and bookstore chains marketing books as mass merchandise rather than literature

Incongruities

• There are several kinds of incongruity– An incongruity between the economic realities of

an industry – An incongruity between the reality of an industry

and the assumptions about it– An incongruity between the efforts of an industry

and the values and expectations of its customers – An internal incongruity within the rhythm or the

logic of an process

Incongruities• How to exploit incongruity? What would convert it into an

opportunity?• A good example is invention of mini-mills in steel industry in

reaction to the problems with large integrated steel mills_ Solve the production cost issue_ Solve the excess capacity issue_ Flexibility to the market demand and the investment need

• In 2000, 50% of steel in US is produced by mini-mills• A similar incongruity between the economic reality of demand

and the economic reality of the process exists in paper industry, but we don’t know how to convert it into innovation and opportunity

Incongruities

• In an incongruity, the innovative solution has to be clearly definable, targeted and focused on specific objectives

• The innovation has to be simple and obvious • Similar incongruity is found in public-service areas• One example is the healthcare with increasing demand and a

cost rise of much faster than services (three to four times as fast)

• Incongruity can exist within a certain process or service that makes it only available to people working within the given process / service. One example is existence of an uncomfortable step in eye surgery that is to tie the blood vessels

Process Need

• Necessity is the mother of innovation • Need is a major source of innovation • Process need is specific and quite concrete• Within the process of a business, industry, or a service• Unlike the other sources of innovation, does not start out with

an event in the environment, Whether internal or external• It starts up with the job to be done• It is task-focused rather than situation focused • It perfects a process that already exists • Everyone in the organization knows about the need• Yet, no one does anything about it

Industry and Market Structures

• Market and industry structures are quite brittle

• It can change quickly requiring fast reaction • A change in industry structure offers

exceptional opportunities visible and quite predictable, but mostly to outsiders

Industry and Market Structures

• When industry structure changes:– If an industry grows significantly faster than the

economy, its structure will change drastically– With rapid growth, the market segments and their

perceptions changes – Convergence of technologies that hitherto were

seen as distinctly separate – When rapid change in the way the business is

done

Demographics

• An external source of innovative opportunity• A change in population, its size, age structure,

employment, educational status, and income• Changing demographics is both a highly

productive and a highly dependable innovative opportunity

Changes in Perception

• Executives recognize the potency of perception-based innovation

• But, they tend to shy away from it as “not practical”

• They consider the perception-based innovator as weird

• Example: A food magazine was launched by a young man based on a change in perception about food

New Knowledge• Knowledge-based innovation is the “super-star” of entrepreneurship• It gets the publicity and the money• KI has the longest least time of all innovations• Long time span between the emergence of new knowledge and its

becoming applicable to technology, and then there is another long period before the new technology turns into products

• The lead time can be shortened by external crisis like war• The long lead time for knowledge-based innovations is by no means

confined to science or technology • It applies equally to innovations that are based on non-scientific and non-

technological knowledge, e.g. Managerial knowledge• The lead time for knowledge to become applicable technology and begin

to be acceptable on the market is between twenty-five an thirty-five years

New Knowledge• Convergence in knowledge-based innovation

– They are almost never based on one factor but on convergence of several different kinds of knowledge, not all of them scientific or technological

– Hybridization of seeds and livestock has been the most beneficial innovation for humanity. It resulted from a combination of the hybrid technique and Mendel’s genetics

– Airplane: a combination of gasoline engine and aerodynamics– Computer: a convergence of five different knowledge: the audion tube, the

binary theorem, the design concept of punchcard, and the concepts of programs and feedbacks

– Banking (G.P. Morgan): systematic knowledge of banking + venture capital concept

– Modern newspaper: High speed printing + Telegraph – The innovation occurs only when these various factors are already known,

already in use someplace

New Knowledge

• What knowledge-based innovation requires– Careful analysis of all factors, that in many cases have been

done, not by scientists, rather by laymen– Clear focus on the strategic position, e.g. first in the market,

a market focus. – Example: DuPont created applications for its nylon

technology– To learn and to practice entrepreneurial management. Many

scientist believe the quality means what is technologically sophisticated rather than what gives value to the users.

– Because of inherent high risks of KI entrepreneurial management is both particularly necessary and effective

New Knowledge

• The unique risk with KI, based on its nature – A awareness of an innovation, but doesn't happen – Then suddenly there is a near-explosion– Followed by a few short years of tremendous excitement,

tremendous start up activities and publicity– A few years later comes a “shakeout” which few survive– The entry window is currently more crowded, resulting in far less

chance of survival– The leader in the industry has the best chance to survive. The leader

might be able to swallow several of its competitors– Of course, there are great differences in structure between various

industries, depending on technology, capital requirements, easy of entry, etc.

New Knowledge

• There are three major focuses for knowledge-based innovation– Complete system: to dominate the field/market.

IBM offered computers with software– Market focus: DuPont provided applications for its

nylon– To occupy a strategic: wile Swan invented a

product, Edison produced an industry

The bright idea• Seven of ten patents belong to this category • Example: the zipper, the ballpoint pen, the spray can, • Bright ideas are the riskiest and the least successful innovations• Not more than one out of every 100 patents earns enough to pay back

development cost• No one knows which ideas have a chance to succeed• Bright ideas are vague and elusive• Even if the need can be defined, the solution cannot be specified• The entrepreneur turns out to forgo innovation based on bright ideas;

although a success is like somebody wins a jackpot • The individual innovation of this kind is not predictable, cannot be organized,

cannot be systematized, and fails in majority of cases• Yet, the tiny percentage of successes represents a substantial source of new

businesses, and new jobs• The society should not discourage, penelize or make difficult such innovations

Principle of innovation

• The do’s– Purposeful and systematic innovation begins with

the analysis of the opportunities – Innovation is both conceptual and perceptual. Use

both sides of the brains– A successful innovation should be simple and

focused– Effective innovation starts small– A successful innovation aims at leadership, not

necessarily at becoming a big business

Principle of innovation

• The dont’s– Not to try to be clever– Don’t diversify, don’t splinter, don’t try to do too

many things– Don’t try to innovate for the future, innovate for

the present

Innovation in existing large companies

• Big businesses go mostly for incremental innovation on their products and services

• Example: GE, Westinghouse, Siemens and Philips were not successful with their computer business in late 50s, IBM (a small one) was

• There are plenty of big businesses successful as innovator

• Innovation can be achieved by any business. But they must be consciously striven for. They can be learned, but it requires effort

Requirements for big companies towards innovation

• The organization must be made receptive to innovation• Organization must be willing to perceive change as an

opportunity rather than threat• Systematic measurement of a company’s performance as

innovator• Adopting a new practice to structure, staffing, managing,

compensation, incentives, and rewards towards innovation• Innovation must be made attractive and beneficial to managers• To be able to devote financial resources to innovation• A second step: to face up to the fact that all existing products and

services, markets, processes and technologies have short life-expectancies

To reduce the rate of failure

• Define – How much innovation is needed– In what area is needed– Within what time frame– Where is the gap

• Put the right question in general

Innovation in the public service institutions

• It is far more difficult to innovate in a public-service institution

• In the absence of a profit test, size is one criterion of success

• Most innovations are imposed by outsiders or by catastrophe

• All innovations and changes in the military have followed on malfunction or defeat

• The innovative people behave like the worst time-serving bureaucrat or power-hungry politician six month later

Reasons for obstacle to innovation in the public service

• Being based on budget rather than paid out of its results

• A public service institution must satisfy everyone, not only its “customers”, dependent on many constituents

• They exist to do good, they see their mission a moral absolute

• They are out to maximize rather than to optimize• The best and most successful example is the labour

union, incapable of taking new challenges

Policies for innovation in pubic service

• A clear definition of its mission• Need a realistic statement of goals • Failure to achieve the objective is a indication

that the objective is wrong• Need to build into their policies and practices

and search for innovative opportunity• An good innovation: Separating the provider

(government, municipal) and supplier (private sector) of public service

The new venture

• For the existing enterprise whether the controlling word is innovation

• For the new venture the controlling word is management

• The new venture has an idea or a product or service

• If not managed how brilliant the idea or product is it will not survive

An example of venture failure

• Thomas Edison– He was ambitious to be successful businessman– He was a superb business planner– He knew exactly how an electric power company should be

set up– He knew how to get all the money he needed for his venture– His products were immediate success– But Edison remained an entrepreneur – Managing meant to him being boss– He refused to build a management team– Every of his four companies collapsed once it got to middle

size

Requirements on entrepreneurial management

• First a focus on the market. Take advantage of unseen and unexpected market

• Financial foresight, specially planning for cash flew and capital needs ahead

• Third, building a top management team long before the new venture needs one and longs before it effort one

• Finally, it requires of the founder a decision on his role and relationship. What he is good at for contribution

• The need for independent objective outside advice

There are four entrepreneurial strategies• "Being fustest with the mostest“

– aiming from the beginning at leadership in a market– Hitting right on the target or it misses altogether

• "Hitting them where they ain't“– Creative imitation who looks at products from the customer point of view – Entrepreneurial judo. Always market-driven, the starting point is technology

• Finding and occupying a specialized "ecological niche“– The toll gate strategy– The specialty skill– The specialty market

• Changing values and characteristics of a product, a market, or an industry– By creating /changing utility– By pricing– By adopting to the customer’s social and economic reality– By delivering what represents true value to the customer