Innovation – An Essential Tool for Entrepreneurship


Entrepreneur Success Series

Resource Note # 3

1.         Link between Entrepreneurship and Innovation

In the last edition of SATTVA, we discussed the concept of entrepreneurship and intrapreneurship. These two concepts in turn are closely related to the concept of innovation. For instance, Churchill (1992) defines entrepreneurship as the process of uncovering and developing an opportunity to create value through ‘innovation’ and seizing that opportunity without regard to either resources (human and capital) or the location of the entrepreneur – in a new or existing company. 

The legendary management guru, Peter Drucker quotes French economist J. B. Say, according to whom the entrepreneur “shifts economic resources out of an area of lower productivity and yield into an area of higher productivity and greater yield.” An entrepreneur’s major task in society is doing something different rather than doing better what is already being done. In simple words the entrepreneur upsets and disorganizes. He sees change as normal and healthy. This is similar to the idea of ‘creative destruction’, propounded by noted economist Joseph Schumpeter. He argued that industries must incessantly revolutionize the economic structure from within, that is innovate with better or more effective processes and products, such as the shift from the craft shop to factory.

According Drucker, the entrepreneur always searches for change, responds to it, and exploits it as an opportunity. That is why innovation is an essential part of entrepreneurship. Drucker says “innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service.”Through innovation entrepreneurs create something new, something different; and change or transmute values.Through innovation entrepreneurs shift resources from areas of low productivity and yield to areas of higher productivity and yield. 

Entrepreneurs try to create new and different values and new and different satisfactions, to convert a “material” into a “resource,” or to combine existing resources in a new and more productive configuration. Drucker observes that there is no such thing as a “resource” until man finds a use for something in nature and thus endows it with economic value. He cites example of ‘The penicillin’ mold which was actually a pest, and not a resource. Bacteriologists used to worry about protecting their bacterial cultures against contamination by it. Then in the 1920s, a London doctor, Alexander Fleming, realized that this “pest” was exactly the bacterial killer bacteriologists had been looking for—and the penicillin mold became a valuable resource.

2.         Meaning of Innovation

According to Drucker whatever changes the wealth-producing potential of already existing resources constitutes innovation. For instance, there was not much new technology involved in the idea of moving a truck body off its wheels and onto a cargo vessel. This “innovation,” was result of a new perception of the “cargo vessel” as a materials-handling device rather than a “ship,” which meant that what really mattered was to make the time in port as short as possible. This “non-technical” innovation roughly quadrupled the productivity of the ocean-going freighter that eventually led to the tremendous expansion of world trade.

Innovation needs to be seen as an economic or social rather than a technical term. For example, August Borsig, the first man to build steam locomotives in Germany, created a ‘managerial’ innovation. It was Borsig who devised the idea of the Meister (Master), the highly skilled and highly respected senior worker who runs the shop with considerable autonomy; and the Lehrling System (apprenticeship system), which combines practical training (Lehre) on the job with schooling (Ausbildung) in the classroom. According to Drucker, this innovation was at the foundation of German system of factory organization and eventually Germany’s industrial strength.

Hence, in simple words innovation can be defined as the successful exploitation of ideas, or turning ideas into profitable products, processes, services or business practices. But central also to the concept of innovation is doing something exceptional, and therefore dealing with uncertainty and risk taking. 

3.         Dimensions of Innovation

Professor Bruce S. Tether, an expert on innovation has proposed conceptual novelty, technological and market uncertainty, and learning and adaptation as key dimensions to innovation.

Conceptual novelty.Generally, there are established ways of doing things, or widely shared perspectives of how to develop something that is not currently technically possible. For example, in case of the vacuum cleaners, basically the same product concept involving suction into a bag existed for over 100 years. Having been dis-satisfied with usage of ‘bag’ James Dyson re-conceptualised the product. He proposed usage of cyclones, and that removed the problematic ‘bag’. This sort of innovation involves as “gestalt switch” in the conceptualisation of the product. In case of process innovation conceptualisation is not about ‘what’ is produced, but it is about ‘how’ to produce.

Technological uncertainty.It can be difficult to know how easy it will be to develop a new technology related to products or processes. Uncertainty depends on the novelty of the technologies involved – both ‘to the world’ and ‘to the firm’, and to the technological complexity of the product – the uncertainty will be lower for simple products than with product systems. Clearly technological uncertainty will be lower if another firm has already achieved the same thing and if the product is simple, than if it is a complex systemic product and a genuine ‘world first’.

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Example

The two famous aircrafts Concorde and the Boeing 747 (“Jumbo”) both were developed around the same time, and both were very significant technological achievements. At that time it was thought that Concorde faced higher technological uncertainty as it was developed as a much speedier aircraft. Airbus later developed the A380 “super-jumbo”, the initial versions of which was to carry about 550 passengers, compared with around 400 in a Boeing 747. In a sense the development of the Airbus A380 also faced technological uncertainty, and more so for Airbus than it would for Boeing, as Airbus did not have direct experience with the production of aircraft approaching that size, whereas Boeing did. This means the technological uncertainty can also be relative. 

(Source: Tether, B. S. (August 29, 2003). ‘What is Innovation?’ CRIC Working Paper No 12, ESRC Centre for Research on Innovation and Competition (CRIC), University of Manchester and UMIST)

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Market uncertainty.There are two types of uncertainties: will the innovation sell? and how will competitors react to its introduction? Professor Tether does not consider market uncertainty dimension in case of process innovation. This is because process innovation is generally internal to an economic unit – there is little market uncertainty in the sense of “will it sell?” because the adopting unit is the same as the supplying unit. There may however be uncertainty as to how quickly competitors might copy the approach, but because processes are internal to economic unit’s knowledge about them tends to diffuse much more slowly.

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Example

Airbus’s A380, made first flight in April 2005 and entered commercial services in October 2007. This was a much bigger aircraft as compared with a Boeing 747. The development of the Airbus A380 was more than a technological challenge, it reflected an understanding of how the market for air travel was expected to develop, an understanding that was not necessarily shared by all. Boeing had claimed “We have a completely different view of the future (from Airbus)”. Fundamentally, Boeing believed that passengers will increasingly want more direct – ‘point-to-point’ – services, which meant less demand in the near future for very large aircraft such as the A380 than Airbus expected. Airbus’s market forecast was based on the further growth of hub-and-spoke operations out of then congested airports like London Heathrow and Tokyo Narita. As of August 2016, Airbus had received 319 firm orders and delivered 194 aircraft; Emirates is the biggest A380 customer with 142 ordered of which 82 have been delivered.

(Source: Tether, Ibid.)

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Exhibit 1: Dimensions of Product Innovation

(Source: Tether, Ibid.)

Learning and adaptation of behaviour.It is deliberate commitments to learning and the adaptation of behaviour which distinguishes process innovation from technological adoption. If an enhanced technology is used simply as a replacement for the previous technology (say Windows 2010 for Windows 2000) there is no significant learning involved, and no adaptation in behaviour. Therefore, no matter how advanced the technologies adopted, this constitutes technological adoption but not innovation.

Exhibit 2: Dimensions of Process Innovation

(Source: Tether, B. S., Ibid)

4.         Scope for Innovation

Normally innovation is associated with products, and processes. However, in order to compete effectively and efficiently, companies need to extend scope of innovations across multiple aspects of the business. Larry Keeley at Doblin group (now part of Deloitte) has identified ten different areas where innovations can take place. Scope for innovation can be split into three areas as shown in following exhibit. At the center is the Offering, which contains the core product elements, and how the product is organized and integrated. To the left is Configuration, how the company is organized to make a profit. And to the right is the Experience, how the company interacts with the customer.

Exhibit3: Framework to Identify Innovation Avenues

(Source: Keeley, L., Pikkel, R., Quinn, B. and Walters, H. (2013). Ten Types of Innovation: The Discipline of Building Breakthroughs.New Jersey: John Wiley & Sons, Inc.)

Let’s look at each of the elements in detail.

(i)        Profit Model

Changing the way the business makes money, is one of the powerful ways of innovating complete business models. For example, in cellular mobile telephony business in India voice calls are the major source of revenue. But Reliance Industries launched a new business model based on fourth generation (4G) technology under the brand name ‘Jio’ which makes voice calls free. The company plans to make money through data usage instead. Similarly, Hilti, the provider of power tools for the construction industry, adopted a new profit model. It offers a subscription service which means companies no longer need to own the tools, which removes the need to service and maintain expensive equipment (Woods, 2015).

(ii)       Network

Today a company can innovate by partnering with others. When ‘Novo Nordisk’ entered the Chinese diabetes care market in 1990s, it collaborated with patients, regulators, and doctors. Thus the company could influence the rules of the game to emerge as uncontested market leader in diabetes care in China, with over 60 percent insulin market share (Reeves, Haanaes & Sinha, 2016). Tie up between Japanese laptop manufacturer Toshiba and UPS, the global parcel delivery behemoth is another example of innovation through networking. Witnessing declining share in the US market, Toshiba needed to reduce customer downtime by providing quick repair service. UPS’s certified technicians would repair returned Toshiba laptops at the UPS shipping hub. This initiative helped Toshiba dramatically reduce repair turnaround time, and helped UPS (Business Today, 2011).

(iii)     Structure

This type of innovation focuses on the company’s internal assets and resources including human resources in a creative way in order to create value. When done well, these are very hard for competitors to copy. For example, this model may involve creating new business units that focus on specific tasks such as research and analytics. 

W. L. Gore & Associates, Inc. an American multinational manufacturing company best known as the developer of waterproof, breathable Gore-Tex fabrics, is an example of innovation in organisation structure. Since 1984, the company earned a position on Fortune magazine’s annual list of the U.S. “100 Best Companies to Work For.” An important factor in this recognition is Gore’s unique culture, which evolved from the company’s success with small teams during its early years. The company has a flat, lattice-like organizational structure where everyone shares the same title of “associate.” There are neither chains of command nor predetermined channels of communication. Leaders replace the idea of “bosses.” Associates choose to follow leaders rather than have bosses assigned to them. Associate contribution reviews are based on a peer-level rating system. In the lattice organization, associates are encouraged to communicate directly with each other and are accountable to fellow members of their teams. Hands-on product innovation and prototyping are encouraged. Teams typically organize around opportunities, new product concepts, or businesses. As teams evolve, leaders frequently emerge as they gain followership (Keeley et al., 2013).

(iv)      Process

This type of innovation is related to how a company goes about producing its products and services – its core operations. Sometimes it’s a patented approach, or a breakthrough methodology such as Toyota’s lean production system. Process innovation can be related to any aspect of value chain of a company For example, Walmart continued to grow its profit through the usage of real-time inventory management systems. Also, they implemented aggressive volume/price/delivery contracts with its merchandise providers, which allowed store management to respond quickly to buyer behaviours (Barney & Hesterly, 2006).

(v)        Product Performance

This type of innovation is related to the design of the product or offering. This includes the product’s basic features and functions that enhance product’s value in the eyes of customers. This type of innovation works closely with the design process as the core focus of the designer is to develop innovative product ideas and turn these ideas into a successful final product. We have already seen the example of reconceptualization of Vacuum Cleaner based on Dyson’s breakthrough dual cyclone technology with no bag. But this took 15 years and more than 5,000 prototypes to produce.

(vi)      Product System

As an extension for the product performance, the product system involves the related ecosystem of the product such as complementary products and services. The objective is to create additional value by adding other firms’ products and services to yours, or combine multiple products to create significantly more value. For example Nike extended its product base to include apps and devices that become part of the sport lifestyle. The web browser Mozilla is built on open-source software, and allows developers to create add-ons to enrich the product. Oscar Mayer offers “lunchables”, combinations of food snacks for school lunches, making it easy for parents and fun for kids (Woods, 2015).

(vii)     Service

Innovating by adding value in how you support customers to search, buy, pay, use and dispose of your product. Service innovation can take several forms such as a service concierge, sampling service, personalised service, delivery and returns service, financing service, self-service, or adjunct services such as warranties, repairs and guides. Zappos.com, an online shoe and clothing company, was acquired by Amazon at $1.2 billion primarily because of its excellent service quality (Keeley et al., 2013). Exhibit 4shows a service innovation launched by Berger Paints in India in September 2016.

Exhibit 4: Service Innovation

(Source:The Times of India(September 19, 2016). Pune edition, p.1)

(viii)    Channel

The channel type of innovation is related to how the product or service will be delivered to the end consumer. This can include new approaches to deliver the product to the consumer. It differs from Network, in that it’s not about whom you work with to make those connections, but more about the ways in which you connect. For instance, Nespresso created a vertically integrated solution for coffee lovers that bypasses third-party retailer. Since 1996, Nespresso ‘business to business’ channel includes The Ritz-Carlton and Hyatt Hotels, British Airways, Lufthansa, Qantas Airways and 650 star-rated chefs. Similarly Amazon’s channel innovation includes Whispernet, a private wireless network that is free for customers to deliver e-books, music and films (Keeley et al., 2013).

(ix)      Brand

Brand can be a powerful innovation in itself, it can represent the values a company/product stand for, or a simple but big idea that resonates with customers. Virgin is a classic example of brand, led by Richard Branson, and companies such as Virgin Atlantic Airways, Virgin Records, Virgin Trains, and Virgin Galactic; Virgin stands for being different and fun, spicing up the industries in which it ventures. Intel is another powerful brand, making a computer component so valuable that having the “Intel Inside” on the box elevates the value of the overall product.

(x)       Customer Engagement

How you understand and then leverage the desires and needs of your customers. They can be hard to spot, often sitting among one of the other nine types. The question is how to interact with your customers and delight them? Let us take the example of Thomson Reuters Corporation, a global information services company, selling to businesses and professionals in the financial, legal, tax and accounting, scientific, and health care sectors. Before redesigning its services, Thomson explored the needs of various market segments using quantitative survey methods combined with “day in the life” ethnographic research on how end users did their jobs. In this phase, the focus was on acquiring a detailed understanding of the activities of the people who relied on Thomson’s products every day. This included visits to users’ own customers. A map was developed to describe the activities of end users of Thomson Financial information products. Thomson could then identify new opportunities for these users to interact with the company over the course of their jobs (Harrington & Tjan, 2008).

4.1       Combination of Innovations

Authors of ‘Ten Types of Innovation’ framework studied companies considered innovative in 2011, grouping them into average and top innovators, and found that top innovators (those repeatedly launching successful offerings) were integrating twice as many types of innovation as the average innovators. The research revealed that while top innovators combined on an average 3.6 innovation types, the average companies had combined only half of this i.e. 1.8 innovation types on an average. It was found thatcompared to the Standard & Poor’s (S&P) 500, companies that integrated multiple types of innovations were more successful over a period of time. Following exhibit clearly shows this. 

Exhibit 5: Number of Innovation Types & Stock Price (Indexed to 100)

(Source: Keeley, et al., op.cit)

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Example

Apple’s iPod involved multiple types of innovation that helped to create and over time defend the sources of value. Various areas in which Apple has innovated are as follows.

Business Model: Sell songs for 99 cents, instead of whole albums
Networking: Relationships with music companies, movie studios, television studios, universities
Process           : Digital rights management software (DRM) that prevents file copying
Product Performance:: Design language of extreme simplicity is used across Apple’s products
Product System:   Inherent interoperability between devices and the online platform; defended by the DRM software that creates a dependency on playing purchased music on the proprietary product line
Channel:  The iTunes Store
Brand:  Managing the portfolio of “i” products as a consistent sub-brand
Customer Experience:  Shift from being the hub of the digital home to the hub of the digital lifestyle; promise of a seamless, interoperable, beautiful product.

(Source:Business Today(December 11, 2011). ‘What global winners teach us’.)

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References

Barney, J. B. and Hesterly, W. S. (2006). Strategic Management & Competitive Advantage. New Delhi: Prentice Hall

Business Today (December 11, 2011). ‘What global winners teach us’.

Churchill, N.C. (1992). ‘Research issues in entrepreneurship’. In Sexton, D. L. & Kasarda, J. D. (Eds) The State of the Art of Entrepreneurship. Boston, Massachusetts: PWS-Kent Publishing. Drucker, P. (1984). Innovation and Entrepreneurship. New York: HarperCollins. 

Harrington, R. J. and Tjan A. K. (March, 2008). ‘Transforming Strategy One Customer at a Time.’ Harvard Business Review.

Keeley, L., Pikkel, R., Quinn, B. and Walters, H. (2013). Ten Types of Innovation: The Discipline of Building Breakthroughs. New Jersey: John Wiley & Sons, Inc.

Reeves, M., Haanaes, K. and Sinha, J. (2016). Your Strategy Needs a Strategy. Harvard Business Press.

Tether, B. S. (August 29, 2003). ‘What is Innovation?’ CRIC Working Paper No 12, ESRC Centre for Research on Innovation and Competition (CRIC), University of Manchester and UMIST.

The Times of India (September 19, 2016). Pune edition.

Woods, T. (December 7, 2015). ‘Using the Ten Types of Innovation Framework’. Available: http://blog.hypeinnovation.com/usingthetentypesofinnovationframework

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