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 186070 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:
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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
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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
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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 nontechnological 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 knowledgebased 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
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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 publicservice 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 timeserving 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
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Finding and occupying a specialized "ecological niche“
– The toll gate strategy
– The specialty skill
– The specialty market
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Changing values and characteristics of a product, a market, or an
industry
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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