Entrepreneurship Chapter No. 3 Innovation The Innovation Concepts

The term innovation derives from the Latin word “Innovatus” which means to renew or change. Although the term is broadly used, innovation generally refers to the creation of better or more effective products, processes, technologies or ideas that are accepted by markets, governments, and society.

Innovation differs from inventions or renovation in that innovation generally signifies a substantial positive change compared to incremental changes. Due to its widespread effect, innovation is an important topic in the study of Economics, business, entrepreneurship, design, technology and engineering etc.

i) Society: In society, innovation aids in comfort, convenience and efficiency in everyday life. For instance, the benchmarks in railroad equipment and infrastructure added to greater safety, maintenance, speed and weight capacity for passenger services. These innovations included wood to steel cars, iron to steel rails, stove heated to steam-heated cars, gas lighting to electric lighting, diesel powered to electric diesel locomotive.

Other areas that added to everyday quality of life include: the innovation to the light bulbs, cellular phones and LCDs Television, microchips/processors etc.

ii) Economics and Business: In the business and economics innovation is the catalyst to growth, with rapid advancement in transportation and communication over the past few decades the old world concepts of factor endowments and comparative advantage which focused on area’s unique inputs are outmoded for today’s global economy.

Harvard economist, ‘Michael Porter’ points out competitive advantage or the productive use of any inputs, which requires continual innovation, is paramount for any specialized firm to succeed.

In addition, entrepreneurs continuously look for better ways to satisfy their consumer base with improved quality, durability, service and price which come to fruition in innovation with advanced technology and organizational strategies.

iii) Organizations: In the organizational context, innovation may be linked to positive changes in efficiency, productivity, quality, competitiveness, market share and others. All organizations can innovate including, for examples, hospitals, universities, and local governments.

Innovative strategies include hospitals digitalizing medical information in electronic medical records, computerized and digital libraries in universities and computerizing official records of the government offices etc.

The Innovation Process:

The innovation process, in the business context, is a structured action that is remarkably easy to implement. It begins with problem and ends with profit. As

such it is the ideal business process, and few businesses have actually implemented this structured innovation process.

i) Begin with a problem:

The innovation process starts with problem or goal. However, the fact that the business has not already achieved the goal might be considered a problem. So we can safely say the process begins with a problem. All businesses have problems e.g. sales could be better, products could be better, process could be more efficient, cost could be reduced and so on.

ii) Convert the problem into a challenge:

Once a problem has been identified, it needs to be converted into a challenge. Example challenges include: in what ways might one improve product? And how might one reduce wastage in his manufacturing process? etc.

Formulating a good challenge that addresses a problem is critical to the innovation process. If a challenge does not properly address the underlying problem, one may get a lot of ideas, but these ideas would not solve the problem and therefore, are unlikely to become innovations.

iii) Challenge colleagues to suggest creative solutions:

Once a person has a terrific innovation challenge, he needs to communicate it to colleagues or others such as business partners, customers or even the public, so that they can generate ideas. How he communicates depends on the method of idea generation he will use for each instance of the innovation process.

iv) Collaborative Idea Generation:

Idea generation might be in the form of a brainstorming activity, through the use of real idea management software or a team may be assigned to devise and develop ideas. A person can even generate ideas himself, but diverse teams generate more creative ideas than individuals. Whatever method of idea generation a person use, it should ideally be in collaborative environment in which people can work together to develop ideas.

v) Combine and Evaluate Ideas:

With lots of ideas the next step is to combine similar ideas into idea clusters or big idea. Each idea cluster can be processed as a single idea, thus making the next steps of the process more efficient. These ideas are evaluated with an evaluation matrix in which promising ideas are compared to relevant business criteria. The better the idea meets each criterion, the higher its score. Ideas with the highest evaluation scores are taken to the next step.

vi) Develop Ideas:

How a person develops ideas depends on the innovation challenge and the kind of ideas generated. New product ideas might be developed into prototypes. Process efficiency ideas may be modeled. Marketing ideas may be evaluated in consumer surveys and so on. The purpose of developing ideas is to test them in the business environment and if no insoluble problems are discovered these are prepared for implementation.

vii) Implement Ideas:

Finally, the evaluated and developed ideas are turn into implementation that generates value for organization. It is at this step that creative ideas grow up and become innovations. The implementing ideas are monitored for desired performance and in case of under-performing, ideas can be killed and resources can rapidly be reinvested in promising new ideas.

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Sources Of Innovative Opportunities

There are several sources of innovations. According to ‘Peter. F. Drucker’ the general sources of innovations are different changes in industry structure, in market structure, in local and global demographics, in human perception, mood and meaning, in the amount of already available scientific knowledge etc.

Drucker outlines seven sources for innovative opportunities that should be monitored by those interested in starting an entrepreneurial venture. The first four are sources of innovation that lie within the industry. The last three arise in the societal environment.

i) The Unexpected: An unexpected success, an unexpected failure or an unexpected outside event can be a symptom of a unique opportunity.

ii) The Incongruity (Strangeness/Clash): A discrepancy between reality and what everyone assumes it to be or between what is and what ought to be can create an innovative opportunity.

iii) Innovation based on Process Need: when a weak link is evident in a particular process but people work around it instead of doing something about it. An opportunity is available to the person or company willing to supply the “missing link”.

iv) Changes in Industry or Market Structure: The opportunity for an innovative product, service or business approach occurs when the underlying foundation of the industry or market shifts.

v) Demographics: Changes in the population’s size, age structure, composition, employment, level of education and income can create innovation opportunities.

vi) Changes in Perception, Mood and Meaning: Innovative opportunities can be developed when a society’s general assumptions, attitude and beliefs change.

vii) New Knowledge: Advances in scientific and non-scientific knowledge create new products and new markets. So, if one is looking for a new business opportunity, monitoring these seven sources may provide with an innovation opportunity.

General Sources / Types of Innovations:

Following are some of the general sources and types of innovations:

Manufacturer Innovation:

In the simplest linear model of innovation the traditionally recognized source is manufacturer innovation. This is where an agent (person or business) innovates in order sell innovation.

End-user Innovation:

Another source of innovation is only now becoming widely recognized is end-user innovation. This is where an agent develops an innovation for their own, personal or in-house use, because the existing products do not meet their needs. MIT economist ‘Eric Hippel’ has identified end user innovation as the most important and critical in his classic book on the subject, ‘Sources of Innovation’.

In addition, the famous robotics engineer, ‘Joseph. F. Engelberger’ emphasizes that innovations requires only three things:

a) A recognized needb) Competent people with relevant technologyc) Financial Support

Innovation by business is achieved in ways with much attention now given to formal research & development (R&D) for bread through innovation. R&D helps encourage patents and other scientific innovations that lead to productive growth in such areas as industry, medicine, engineering and government.

Yet innovation can be developed by less formal on-the-job modifications of practices through exchange and combination of professional experience and by many other routes. The more radical and revolutionary innovations tend to emerge from R&D while more incremental innovation may emerge from practice but there are many exceptions to each of these trends.

User Innovation:

An important innovation factor includes customers buying products or user services. As a result, firms may incorporate users in focus groups (users centered approach), work closely with so-called lead user (Lead user-approach) or users might adapt their products themselves.

Regarding this user innovation, a great deal of innovation is done by those actually implementing and using technologies and products as part of their normal activities.

In most of times user innovators have some personal record motivating them. Sometime user innovators become entrepreneurs selling their product, they may choose to trade their innovation in exchange for other innovations or they may de adopted by their suppliers.

Now-a-days, they may also choose to freely reveal their innovation using methods like “open source”. In such networks of innovations the users or communities of users can further develop technology and reinvent their social meaning.

The Importance Of Innovation In Entrepreneurship

The economy is composed of enterprises and businesses. An economy has survived because the industry leaders had been able to adapt to the changing times and supplied mostly the communities’ needs. Any small business is integral to the economy. Without it, the economy would not survive. But a business must also sustain itself, be able to constantly evolve to fulfill the demands of the community and the people. In every business, it is imperative to be industrious, innovative and resourceful.

Financial Gain: Entrepreneurship produces financial gain and keeps the economy afloat, which gives rise to the importance of innovation in entrepreneurship. Entrepreneurs are innovators of the economy. It is not just the scientist who invents and come up with the solutions.

New Product or a Solution: The importance of innovation in entrepreneurship is shown by coming up with new way to produce a product or a solution. A service industry can expand with another type of service to fulfill the ever changing needs of their clients. Producers can come up with another product from the raw materials and by-products.

Durability of Business: The importance of innovation in entrepreneurship is another key value for the durability of a business. Entrepreneurs and businesses began with a need. They saw the need within the community and among themselves that they have come up with a solution. They seize the opportunity to innovate to make the lives more comfortable. And these solutions kept evolving to make it better, easier and more useful. Entrepreneurs must keep themselves abreast with the current trends and demands. Manufacturers are constantly innovating to produce more without sacrificing the quality.

Success of the Company: Companies and enterprises keep innovation as part of their organization. Innovations contribute to the success of the company. Entrepreneur, as innovators, see not just one solution to a need. They keep coming up with ideas and do not settle until they come up with multiple solutions. Innovation is extremely important that companies often see their employees’ creativity as a solution. They come up with seminars and trainings to keep their employees stimulated to create something useful for others and in turn, financial gain for the company.

Competition: Other factors that raises the importance of innovation in entrepreneurship is competition. It stimulates any entrepreneur to come up with something much better than their competition in a lower price, and still be cost-effective and qualitative.

Community Needs: Small businesses see the importance of innovation in entrepreneurship. They were able to compete with large industry and see their value in the economy. Small businesses are important as they are directly involved in the community and therefore, contribute to their financial and economic gain. These small businesses know exactly what community needs and fulfill them. All things start small.

Innovation is important not just in entrepreneurship. As individuals, we are innovators by adapting well to our needs and create our own solutions. Entrepreneurs are the same. The innovation in entrepreneurship helped the country by changing with the times and producing new products and service from

ones that already exists. And, being innovative has helped us become successful in all our endeavors.

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Risks Involved In Innovations :

On one side of the innovation is its benefits but to look on the other side of innovation there are not only benefits; in the case that an organization starts to focus on innovation it may face some disadvantages. These can also be referred as risks when entering an unknown field (of business). It does not mean that one should not use innovation. But it will helpful to anticipate and to understand these risks in order to tackle them.

Innovations always involve particular risks for the organization. A company that searches for new ways, processes and types of organization is confronted frequently with the risk to land in a dead end. Another disadvantages of a “we are innovators”-approach is the need to review strategy more often; hence structural adaptations which are linked to strategy can take place more often, too. An organization has to consider further five typical disadvantages:

1. It is possible that a new business model (in order to add value) does not create a competitive advantage (e.g. due to bad timing). Eventually the new business model has to be abandoned after the testing phase.

2. An economically strong follower copies the innovation and turns it into the industry standard. Therefore the innovation become the “standard solution” for every company within the industry and loses its innovation status. This will destroy the competitive advantage for the innovator. (Note: It is also possible that a competitor has another innovation and transfers it to the industry standard. Example for this is the format war between Blu-ray and HD-DVD, that was won by Sony)

3. A follower is able to learn more quickly (e.g. to fix starting errors) and to achieve the readiness for marketing quicker than the innovator.

4. The innovator overestimates his innovation power and his organizational capabilities (e.g. change management, financial resources) to bring an innovation to the market place.

5. Misinterpretation of the market. The new product is excellent in terms of technical specifications. Despite these features no customer is willing to pay for them, since their costs are higher than their expected benefits (e.g. over engineered product). Another option is that customers have a minor different behavior then expected (e.g. do not accept your pricing policy, are less loyal).

 All these risks represent the line of a loss of resources for the innovator. In addition undeveloped products can cause reputation damages.

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Major Kinds Of Risk Associated With Innovation

There are three different major kinds of risk associated with innovation- time, money and reputation. These are the key reasons why some individuals and

organizations are reluctant to invest in innovation. Let us understand the risks and try to find a way out.

Time: “Time is money”, an organization is answerable to its stakeholder and achievements would be measured at the end of every quarter. Such a scenario creates a mindset like a pre-programmed robot. Some organizations talks about their so called “Think Tank” which is the only reliable source of innovation and rest are all chip driven execution units. If the “Tank” goes dry, the organization fails. I feel this is where the thinking needs to change. Allow everyone to think and innovate at least once in a week to create the enormous pool of ideas which the “Think Tank” can then mobilize. It also creates a sense of ownership among employees. Decentralization of idea generation could be a solution to the “time risk” involved in innovation.

Money: “Innovation” is a much hyped (overvalued) word which is often used as a premium. “Research and Development” is another very heavy word which often means huge expenses. Creativity is not about rocket science and expensive labs with hooded humans moving around with fuming test tubes. Creative inspiration requires encouragement and the right environment, and then every workstation can become a virtual lab. Newton got the great idea sitting under a tree, all of us are not Newton and we are not sitting under a tree either. Encourage people to come up with low cost ideas, empower them to execute and the “money risk” of innovation could soon become irrelevant.

Reputation: The risk of reputation emerges from the fear of failure or criticism. We have seen so many instances of authors being criticized or attacked for writing on topics they believe in. But we keep getting new breed of writers across generations who are fearless with the pen. Such mindsets could become inspiration for others. Intent and self belief differentiates the winner from the loser.