Chapter 11 - Entrepreneurship and innovation

Question 1

Innovation dilemmas

Answer 1

• Technology push vs. market pull
• Product innovation vs. process innovation
• Open innovation vs. closed innovation

Question 2

Entrepreneurship

Answer 2

is a process by which individuals, start-ups or established organisations identify and exploit opportunities for new products or services that satisfy a need in a market.

Question 3

Opportunity recognition

Answer 3

recognising an opportunity, i.e., circumstances under which products and services can satisfy a need in the market or environment.

involves three important and interdependent elements:
1. ** The entrepreneur or entrepreneurial team** - drives and integrates various parts of an entrepreneurial process including: a. Scanning and spotting trends in the environment. b. Linking these to existing resources and capabilities or acquiring appropriate
2. The environment - entral in identifying an opportunity is building on macro trends and marketplace gaps. Observing economic, technological, social and political trends and linking them to unsatisified customer needs. Spotting macro trends, industry and strategic group analysis and Blue Ocean thinking to identify new market opportunities.

3. Resources and capabilities - important part of opportunity recognition. Mapping and evaluating Resources & Capabilities (VRIO, value chain, activity systems).

Question 4

Entrepreneurial process steps

Answer 4

Six steps of an entrepreneurial venture:
1. Start off with opportunity recognition
2. Entrepreneur and start-ups can usefully include an initial** feasibility analysis**
3. Developing a business plan
4. Industry conditions and competitors are considered, competitive positions evaluations with “five forces” and “strategic groups analyses”, competitors potential to imitate the venture’s resources and capabilities with “VRIO”.
5. Business model and strategy, Start-up’s needs to consider how to create value for the customers, how to manage revenues and costs, how to generate a margin and whether to build on an established business model or create a new one. A distinct competitive strategy position and advantage need to be identified. Entrepreneurs choose between the competitive strategies of differentiation, cost and focus or any possible hybrid strategy.
6. Firms financial strength in terms of financing and funding need to be carefully examined.

Question 5

Entrepreneurial life cycle

Answer 5

progresses through start-up, growth, maturity and exit.
Key steps for the four stages of the cycle:
* Start-up - Key challenge is sources of capital. Loans from family/friends, banks and credit cards.
* Growth - Key challenge for growth is management. Entrepreneurs have to be ready to move from ‘doing’ to ‘managing’.
* Maturity - Challenge to retain their enthusiasm and commitment and generating new growth. Entrepreneurship can change to intrapreneurship, the generation of new ventures from inside the organisation.
* Exit - Exit refers to departure from the venture, either by the founding entrepreneurs, or by the original investors, or both. Entrepreneurs and venture capitalists want to release capital as a reward for their input and risk-taking.

Question 6

Social Entrepreneurship

Answer 6

are individuals and groups who create independent organisations (NGO/NFPO) to mobilise ideas and resources to address social problems, typically earning revenues but on a not-for-profit basis.

Independence and revenues generated in the market give the flexibility and dynamism to pursue social problems that pure public-sector organisations are often too bureaucratic and politically constrained, to tackle.

Thre key choices for social entrepreneurs:
* Social mission - For social entrepreneurs, the social mission is primary, can embrace two elements: End objectives and operational processes.
* Organisational form - Three basic forms social entreprenerurism: Purely non-profits,** Hybrid form** including some minor commercial aspects, and Social companies that are business and profit oriented, but with investors wanting both social and financial returns.

Question 7

Innovation dilemmas

Answer 7

One important ingredient and outcome of entrepreneurship is innovation.

Not only for start-ups but also big firms that continuously need to develop new and innovative products and services to successfully compete.

Question 9

Invention

Answer 9

Involves the conversion of new knowledge into a new product, process or service.

Question 10

Innovation

Answer 10

Innovation - involves complex conversion of new knowledge into a new product, process or service and the putting of this new product, process or service into actual commercial or other use.

Question 10

Technology push view

Answer 10

It’s new knowledge created by technologists or scientists that pushes the innovation process.
* Research and development laboratories produce new products, processes or services and then hand them let the rest of the organisation to manufacture, market and distribute.
* Managers should listen and support primarily their scientists and technologists.

Question 11

Market pull view

Answer 11

This goes beyond invention and sees the importance of actual use. Users are the sources of important innovations.
* Organisations should listen in the first place to users rather than their own scientists and technologists.
* Two prominent but contrasting approaches to market pull:
* ** Lead users:** Lead users are the principal source of innovation. It’s the pull of market experts that is responsible for innovation. Managers need to build close relationships with lead users such as the best surgeons or sporting champions.
* **Frugal innovation: **The pull is exerted by the poor in emerging markets, frugality is the guiding principle here, trying to do more with less. Frugal innovation responds to’ lack of money, emphasises low cost, simplicity, robustness and easy maintenance.

Question 12

Product innovation

Answer 12

relates to the final product (or service) to be sold, especially with regard to its features.

Question 13

Process innovation

Answer 13

relates to the way in which this product is produced and distributed, especially with regard to improvements in cost or reliability.

Question 14

Product and process innovation over time

Answer 14

Several strategic implications:
* New developing industries favour product innovation, as competition is still around defining the basic features of the product or service.
* Maturing industries favour process innovation, as competition shifts towards efficient production of a dominant design of product or service.
* Small new entrants have the greatest opportunity when dominant designs are either not yet established or beginning to collapse.
* Large incumbent firms have the advantage during periods of dominant design stability, when scale economies and the ability to roll out process innovations matter most.

Question 15

Innovation diffusion

Answer 15

Diffusion is the process by which innovations spread among users.
* innovations commercial attractiveness follows the pace of the market adoption to new products and services.
* Managers influence this pace of diffusion, from demand and supply side, also using the S-curve.

Question 16

The pace of diffusion

Answer 16

The pace of diffusion vary widely according to the nature of the products concerned.
* E.g. It took 28 years for the television to reach 50 per cent of ownership and use in the USA and the mobile phone only half that time.
The pace of diffusion is influenced by a combination of supply-side and demand-side factors, over which managers have considerable control.

On the supply side, pace is determined by product features such as:
* Degree of improvement in performance above current products (Customer perspective) that provides incentive to change.
* Compatibility with other factors. Managers and entrepreneurs need to ensure appropriate complementary products and services are in place.
* Complexity, in the product itself or in the marketing methods being used to commercialise the product. Simple pricing structures typically accelerate adoptions.
* Experimentation, to test products before commitment to a final decision – either directly or through the availability of information about the experience of other customers.
* Relationship management, Managers and entrepreneurs need to put in place an appropriate relationship management process to assist new and existing users.

On the demand side affordability is key. Three factors that drive the pace of diffusion:
* Market awareness. Many potentially successful products have failed through lack of consumer awareness.
* Network effects refer to the way that demand growth for some products accelerates as more people adopt the product or service. Once a critical mass of users has adopted it, it becomes of much greater benefit for others to adopt it too.
* Customer propensity to adopt: the distribution of potential customers from early-adopter groups (keen to adopt first) through to laggards (typically indifferent to innovations).

Question 17

The Diffusion S-curve

Answer 17

The pace of diffusion is not steady. Successful innovations diffuse according to a broad S-curve pattern.

The S-curve reflects a process of initial slow adoption of innovation, followed by a rapid acceleration in diffusion, leading to a plateau representing the limit to demand.

Question 18

First-mover advantage

Answer 18

exists where an organisation is better off than its competitors as a result of being first to market with a new product, process or service
* Fundamentally, the first mover is a monopolist (temporary), able to charge customers high prices without fear of immediate undercutting by competitors.

Six potential first-mover advantages:
* Network effects - More users → positive value effect for other customers.
* Experience curve benefits for first movers, as their rapid accumulation of experience with the innovation gives them greater expertise than late entrants still relatively unfamiliar with the new product, process or service
* Scale benefits for first movers → establish earlier than competitors the volumes necessary for mass production and bulk purchasing.
* **Pre-emption **of scarce resources for first movers, as late movers dont have the same access to key raw materials, skilled labour or components → pay dearly for them.
* Reputation enhanced by being first, consumers have little ‘mind-space’ to recognise new brands once a dominant brand has been established in the market.
* Buyer switching costs exploited by first movers, by locking in their customers with sticky relationships, later challengers breaks with difficulty. Switching costs can be increased by establishing and exploiting a technological standard.

Question 19

Disruptive innovation

Answer 19

Challenges incumbents of an industry since the innovation creates substantial growth by offering a new performance trajectory that, even if initially inferior to the performance of existing technologies, has the potential to become markedly superior.