Entrepreneurship/Leadership/Innovation- MGT 2251Y

UNIT 2: INNOVATION Unit Structure 2.0

Overview

2.1

Learning Objectives

2.2

Introduction

2.3

Misinterpretations of Innovation 2.3.1

First Misinterpretation: Innovation = Invention

2.3.2

Second Misinterpretation: Innovation = New Products (Services Only)

2.4

2.3.3

Third Misinterpretation: Innovation = Original

2.3.4

Fourth Misinterpretation: Innovation = One off Inspiration

Sources of Innovation 2.4.1

Sources of Innovation within Companies or Industries 2.4.1.1 Unexpected Occurrences 2.4.1.2 Incongruities 2.4.1.3 Process Needs 2.4.1.4 Industry and Market Changes

2.4.2

Sources of Innovation in the Social Environment 2.4.2.1 Demographic Changes 2.4.2.2 Perceptual Changes 2.4.2.3 New Knowledge

2.5

Categories of Innovation 2.5.1

Incremental Innovation

2.5.2

Radical Innovation

2.5.3

Product Innovation

2.5.4

Process Innovation

2.5.5 Extension Innovation

2.6

2.5.6

Duplication Innovation

2.5.7

Synthesis Innovation

Innovation and Firm Size

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2.7

Innovation and External Linkages 2.7.1

Link with Suppliers and Subcontractors

2.7.2

Links with Customers

2.7.3

Links with Competitors

2.7.4

Links with Universities and Colleges

2.8

Summary

2.9

References

2.0

OVERVIEW

Innovation has often been confused with invention and misinterpreted. In this Unit, we shall identify sources of innovation, from industries and from the social environment. Innovation will be categorised. An analysis of firm size as related to innovation will be proposed. Finally, the links between the organisation and its stakeholders will be shown to trigger innovation.

2.1

LEARNING OBJECTIVES

By the end of this Unit, you should be able to do the following:

1. Define innovation as being distinct from invention. 2. Categorise innovation under distinct heading based on magnitude and type. 3. Identify sources of innovation as arising from industry or from social environment. 4. Relate innovation and firm size as to the type of innovation possible based on size. 5. Discover how linkages between the organisation and its stakeholders can trigger innovation.

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2.2

INTRODUCTION

Innovation is not invention. Invention is only part of the process whereby innovation is more holistic and incorporates both creation or discovery aspects and diffusion or utilisation aspects.

Schumpeter (1934) identified five sources of innovation: a) the introduction of a new product/service or a significant improvement in the quality of an existing one. b) the introduction of a new method of production. c) the opening of a new market. d) the ‘conquest’ of a new source of supply of raw material or half manufactured goods. e) the creation of a new type of industrial organisation.

In the pursuit of economic prosperity, the entrepreneur has tended to take on a heroic aspect in the role of innovator. While large firms specialise in efficiency and policy, small firms are hot beds of creativity. The entrepreneurial innovator is a non conformist who does not fit into conventional education and organisational patterns. Large firms tend to constrain their creative talents and they find the freedom to develop in the smaller firms.

One example of an innovator is Anita Roddick (The Body Shop). She saw the need for cosmetics in cheap containers of different sizes with simple labels and made with natural ingredients that were eco-friendly. She further innovated with franchising the business.

Activity 1

Identify the sources of innovation in the above example.

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2.3

MISINTERPRETATIONS OF INNOVATION

Before trying to understand what is innovation, it is interesting to have a view on what is not, that is, on the misinterpretation of innovation.

2.3.1 First Misinterpretation: Innovation = Invention Invention and Innovation do somewhat overlap, but they are not the same. An invention is a creative idea while an innovation makes that idea feasible and turns it into a product or service that satisfies customers’ needs.

Activity 2

Discuss whether the mobile phone created a need in the market.

2.3.2 Second Misinterpretation: Innovation = New Products (or Services) Innovation has rightly been associated with many cases of new product development, for example, 3M’s Post-It Notes or Xerox plain paper copier. However, innovation can concern other new development e.g. new markets or new marketing methods.

One example of a new market for essentially the same product is 3M’s adhesive tape. Introduced in 1930 for the Industrial packaging market, the Scotch Tape was later resold as sellotape (complete with tape and dispenser) as an office commodity.

Instead of trying to sell the expensive Xerox Copier to companies, Xerox provided its machines on a rental basis whereby client firms only paid for copies with petty cash (instead of capital investment).

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2.3.3 Third Misinterpretation: Innovation = Original Innovation often builds on old existing ideas and resources. Originality arises only in the creative recombination of resources to give a new idea/use. Innovation has the unique capacity to pick up the ideas of others and remix them to form a unique pattern. In music, we have already seen “remixes” becoming more popular than “originals”.

2.3.4

Fourth Misinterpretation: Innovation = One Off Inspiration

Unlike the one sudden flash of inspiration, innovation is a gradual process that takes place over a period of time (or incubation). What becomes one off in the entrepreneur’s creativity is the change from an innovation focus (after the first innovation) to a management focus. After the first innovation, the innovator has now become a manager, running his business (based on the first innovation). Unless he/she now leaves the business (Build, Operate, Sell or Transfer), a new innovation may now be difficult to materialise.

2.4

SOURCES OF INNOVATION

Although some innovations do occur “spontaneously”, most innovations result from a methodical analysis of areas of opportunity within firms or industries and in social or demographic trends.

Innovators are generally attentive to changes which give them clues to what opportunities may come in future.

In Mauritius, the development of out of town hypermarkets followed (and exploited) changes in the more widespread ownership of the motor car, that is, the strength arising from increased personal mobility coupled with the threat arising from increasing city congestion. The entrepreneur therefore investigates and analyses change in order to find innovation opportunities.

In his book “Innovation and Entrepreneurship”, Peter Drucker (1986) identifies seven sources of innovation opportunity, four of which in companies and industries and three of 5

Entrepreneurship/Leadership/Innovation- MGT 2251Y

which in the social environment.

2.4.1 Sources of Innovation within Companies or Industries 2.4.1.1

Unexpected Occurrences

Both unexpected successes and failures can become productive sources of innovation. For example, the antibacterial effect of Penicillin was discovered accidentally by Alexander Fleming in 1929. Similarly, IBM made its first computers for the scientific community – To their surprise, their established business customers showed keen interest in using this complex equipment for simple tasks like book keeping and pay roll. IBM innovated with respect to this unexpected interest and established itself as market leader.

Unexpected failures can also trigger innovation. For example, a particular private school with very good academic achievement, excellently located in an affluent, populated neighbourhood found itself unexpectedly losing student population over the years. Upon market survey, it was found that parents were now looking for a balanced education approach where extracurricular activities were given more importance. The school then created a number of sports clubs and school based societies, some run by parents and eventually had a waiting list of potential students.

2.4.1.2

Incongruities

These occur when there is a gap between expectations and reality. Federal Express was born in the early seventies out of an expectation by Fred Smith that there was a need for overnight mail delivery. Small business owners are risk takers by definition.

However, when it comes to reinvest their surplus elsewhere, they become unexpectedly cautious. Proposing them a high risk (and high expected return) investment is therefore not a good idea. They would rather prefer a moderate risk investment.

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Activity 3

Research on FEDEX and identify a recent innovative process developed by the firm.

2.4.1.3

Process Needs

Drucker (1986) highlights some particular need, the process need, as a source of innovation, whereby “necessity is the mother of invention”.

Originally, there existed two main types of glass. Sheet glass was cheap but optically imperfect while plate glass was very expensive because if required hand polishing to make it optically perfect. There was an unmet need for a relatively cheap glass with good optical properties.

The Pilkington glass was later developed by a “floating” technology in which molten glass is floated on a bath of molten tin which keeps it flat and regular on caking.

One important aspect of this type of innovation is that, primordially, a need must be felt in the first place so that research/efforts can be focused to develop the required innovation.

2.4.1.4 Industry and Market Changes Consumer preferences may change continually, following changes in technology and in social values and attitudes. Therefore, old ways of satisfying market needs have to be redressed. The printing industry is one example where technology has caused a major disruption in customer attitudes. People now want the product immediately from computer aided technology. “New generation” printers do not face barriers to entry in the industry because it is not necessary to invest in heavy machinery (offset press etc).

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Activity 4

Explain how far the CD-Rom and the internet are affecting the Printing Industry now and future.

2.4.2 Sources of innovation in the social environment 2.4.2.1 Demographic changes Demographics is a reliable external source of innovation opportunity because census data provides a precise picture of the market and can be reliably extrapolated, for example, future age structure. Demographic changes can therefore be signalled well in advance in an unambiguous and clear manner.

Longer life expectancy and lower death rates will surely create demand for old age health care and home facilities in future. Similarly, an abnormally high birth rate in a given year will inevitably result in increasing demand for places in college some ten years later.

Activity 5

Old age people may have disposable income but cannot travel abroad because of health hazards. Propose an innovative idea to provide overseas travel leisure for affluent old people.

2.4.2.2 Perceptual Changes Opportunities can arise when members of a community change their interpretation of facts and events. “Perceptual changes can particularly affect dimensions such as acceptability, beauty, time and distance”. (Schaper & Volery, 2004).

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Consumer now feel an urgent need to protect their environment, a concept which had little adherence a few decades ago. Manufacturers have seen here opportunities for “Green Marketing of product innovators”. One example is Mauvilac’s “green” orientation in paints. Entrepreneurs have to be careful, however, to differentiate, temporary perceptual changes (i.e. fads) from longer lasting developments.

Activity 6

Identify a few marketing innovation following the “Green” movement.

2.4.2.3 New Knowledge History making innovations abound with those based on scientific, technical or social new knowledge. They are known to have the longest lead time of all innovations, for example, bioscience innovations are built on new knowledge from several fields and take time to materialise. For this reason, knowledge based innovations are the least attractive to entrepreneurs in general. The first television was based on earlier research on radio wares. It scanned an image into lines of dots of light using a mechanical method. Only a decade afterwards did electronic systems bring about an acceptable product.

Activity 7

Explain the limitations mentioned above concerning knowledge based innovations.

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Entrepreneurship/Leadership/Innovation- MGT 2251Y

2.5

CATEGORIES OF INNOVATION

When termed as an outcome, innovation can be a tangible product or a service. As a process it can be either incremental or radical.

2.5.1 Incremental Innovation This refers to demand led innovation, where big clients want steady improvements to yield higher margins. Incremental innovations do not conquer new markets, but rather retain existing loyal customers through continuous improvements of established products/services. Incremental innovation can be rapidly implemented and give immediate gains.

2.5.2 Radical Innovation These are based on disruptive technologies which have to create new markets and find new customers. The transistor was a disruptive technology which made the vacuum tube industry become obsolete.

Radical innovation is a fundamental rethink of established ideas/products, needs to be nurtured for long periods and can potentially give big gains in future by creating new markets.

Activity 8

How far was the digital camera a disruptive innovation?

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2.5.3 Product Innovation Refers to the development of a new or improved product. The mobile phone is a product innovation which has revolutionised mobile communications and is still “innovated” incrementally. “58% of innovations in the scientific instruments industry, between 1945 and 1983, are calculated to have come from SMEs…This compares to only 14% for SMEs in the pharmaceutical industry”. (Stokes, 1995).

Activity 9

Can you explain why this difference between SME innovation performance in the two industries?

2.5.4 Process Innovation This can refer to the development of a new management process e.g. Business Process Reengineering or development of a novel manufacturing technique e.g. assembly line and robotisation in the automobile industry.

2.5.5 Extension Innovation Innovation takes place through the improvement or new use of an existing product/service. One example is the development from the mainframe computer to the desktop, then laptop and more recently the notebook computer.

2.5.6

Duplication innovation

Duplication refers to adaptation of an existing product (or process) to a different application. One example in service industry is the adaptation of the franchise from fast food industry to the education industry.

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Activity 10

Find further examples of duplication innovation.

2.5.7 Synthesis Innovation The fax machine is an example of the above, whereby the combination of existing technologies has given rise to a new product technique (telephone + photocopier = fax)

2.6

INNOVATION AND FIRM SIZE

Schumpeter (1934) proposed that it was the creative drive of entrepreneurs which led to the introduction of radically new products and the creation of new industry structures. In 1950, the same author, in his book “Capitalism, Socialism and Democracy” adopts a diametrically opposed position. He then suggested that large firms may be able to spread the risks of innovation over a number of projects, whereas small firms may be reluctant to ‘put all their eggs in the same basket’.

Schumpeter (1934) also referred to the importance of monopoly power in stimulating innovation. Successful patents which confer exclusive rights and prevent imitations allow a firm to recoup R & D costs and give the power to set prices (skimming strategy).

In support of the above, Galbraith argued that: “Because development is costly, it follows that it can be carried on only by a firm that has the resources which are associated with considerable size”. Large firms can therefore spread the R & D costs over a large sales volume.

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Activity 11

Give suitable examples of such large firm innovation.

The view that large firms are responsible and/or capable of innovation and wealth creation has prevailed until the early eighties. According to Acs and Audretsch, 1993, a “new learning” has emerged whereby smaller firms may match large firms or even more efficiently use R & D inputs to generate innovation outputs.

This is explained by Deakins & Freel (2003): “The relative importance of small and large firms may vary over the business cycle or industry life cycle. Following this line of reasoning, small firms may benefit from comparative advantages as innovators in embryonic stages e.g. in biotechnology and e-commerce (relatively low investment and niche markets). Large firms may dominate innovation in mature industries such as consumer durables”.

“Industries which are capital intensive, concentrated and advertising intensive tend to promote innovation in large firms. The small-firm innovation advantage, however, tends to occur in industries in the early stages of the life-cycle, where total innovation and the use of skilled labour play a large role”. (Acs and Audretsch, 1993).

It appears therefore that radical innovation takes place in large firms or large public laboratories while small firms innovate in near to market developments and initial market diffusion. However, small firms do display a number of advantages and disadvantages in the emergence of new technologies.

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Issues

Advantages

Disadvantages

Management

Lack of bureaucracy, rapid

Lack of formal management

decision making

skills

Near to market-fast reaction

Geographic Market

to market niche

expansion costly

Marketing

requirements Finance

HR

Government schemes

SMEs more R & D efficient

Difficulties accessing

(less costly innovation)

external finance for growth

Flat structures and local

High staff turnover, little

project ownership

formal training

Govt schemes established to Lack of awareness. Few facilitate small firm

resources available to

innovation

manage collaborating schemes.

Table1: Advantages and disadvantages of small firms in innovation

To overcome disadvantages, a number of measures are to be taken by authorities and by entrepreneurs themselves. Public policy can alleviate resource constraints through government schemes. Small firms can engage in innovation networks with suppliers and/or customers. Small firms should further maintain the advantages associated with small size, for example, adaptability and flexibility by refusing to “bureaucratise”.

2.7

INNOVATION AND EXTERNAL LINKAGES

In general, small firms are resource constrained, but behaviourally advantaged as can be inferred from previous table. The challenge is therefore to overcome resource constraints while making the best of behavioural advantages. This can be achieved by “strategic partnering” with a number of stakeholders, for example, suppliers, subcontractors, customers, competitors, training institutions and the Authorities.

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Entrepreneurship/Leadership/Innovation- MGT 2251Y

2.7.1 Link with Suppliers and Subcontractors Relationships with suppliers involve a transaction cost which may be lowered considerably if “partnerships” can be created. “Just in Time” (JIT) is one of those partnerships where the supplier delivers raw materials/components to the clients’ factory floor at the moment they are required for production. This eliminates inventory costs for the manufacturer and is mutually beneficial.

In the case of subcontractors, the firm benefits from the advantages of vertical integration and larger size while not really investing in same. A small firm’s capacity to innovate can be enhanced by the additional knowledge base obtained through links with subcontractor and supplier. When supplies are asked to contribute in the design and development of products, it becomes possible to innovate without having to invest heavily in expensive sophisticated environment.

Activity 12

Explain the business consequences of JIT as a process innovation.

2.7.2 Links with Customers Understanding customer needs is essential for the success of innovations. It is also necessary to secure their formal collaboration to close the feedback loop. Customers can be involved in the design and development phases (instead of the product testing phase only). The firm can have substantial gains when they access the skills of the customer. Furthermore, the post delivery learning time is reduced and continuous user feedback can trigger product improvement that lengthen the product life cycle through innovations.

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2.7.3 Links with Competitors Dodgson (1994) suggests that interfirm collaboration can lead to “positive sum gains”, that is, “firms can obtain mutual benefits that could not be achieved independently”. Gains normally arise from direct collaboration between small firms through their enhanced innovative capability (development of synergies). Small firms “rely on networking and a process of socialisation that allows them to collect information and accumulate knowledge”, (Capello, 1999).

Such networking relationships are often supported by governments who support synergies to establish collective economies of scale through pooling of fixed costs. One example is the Incubator model whereby the Incubator provides infrastructure, business advice and logistics to a number of firms in a “common” location.

“Cambridge in the U.K is home to a number of High Technology Clusters………..In computing, not only are there research collaborations between the University and the firms in the Cluster, but also there is a skilled workforce graduating from the University and a group of academics willing to work part time with them”. Burns (2007).

Activity 13

Explain the functioning of geographical clusters in industry.

In the U.K, the Competitiveness White Paper of 1998 suggests that “there may be a role for government in brokering greater collaboration between firms or between firms and communities”.

2.7.4 Links with Universities and Colleges It is generally accepted that the success of Silicon Valley is partly due to its proximity to Stanford University. In the U.K, Science Parks have been built near Universities for this 16

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reason. This can take place in a number of ways. Small firms can make for their resource deficiencies by accessing University expertise and laboratories without having to invest in costly sophisticated equipment. They also have access to university research from where they can develop new products/services.

Activity 14

Identify a few possible links between University and Industry in Mauritius.

The link between University and Industry in mutual collaboration has the capacity to spur innovation in an enriching relationship. More and more Industry practitioners are invited to teach in Universities and at the same time, Universities are called upon to do applied research targeted towards demand led innovations.

Activity 15

Explain how the link between Industry and University can enhance National Competitiveness in that Industry.

2.8 SUMMARY Innovation is similar but not identical to invention and can be categorised based on magnitude and type and sources of innovation can be identified from organisations, industries and the social environment. It is possible to relate firm size with types of innovation linkages between organisations with its stakeholders (for example, customers, suppliers). This can enhance the innovation process and lower costs of innovation.

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2.9

LIST OF REFERENCES 1. Acs, Z. & Audretsch, D. (1993). Innovation and firm size: the new learning. 2. Arnold, J.E. (1962), Education for innovation, New York, Scribner. 3. Bolton,W. K. & Thomson, J.C.(2000), Entrepreneurs, Talent, Temperament, Technique. 4. Burns, P. (2007), Entrepreneurship and Small Business, Palgrave, Macmillan. 5. Bygrave, W. (1997), The Entrepreneurial Process, New York: John Wiley & Sons. 6. Majaro, (1988), The Creative Gap, London: Longman. 7. Parkhurst, H.B. (1999), Journal of Creative Behaviour. 8. Proctor, T. (2002), The Essence of Creativity, Prentice Hall, India. 9. Timmons, J. A. (1999), New Venture Creation, Irwin/Mc Graw Hill. 10. Thomson, V. (1969), Bureaucracy and Innovation, University of Alabama Press. 11. Von Oech, R. (1998), A whack on the side of the head, New York: Warner Books. 12. Wertheimer, M. (1945), Productive thinking, New York: Harper & Row.

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