Innovation and Entrepreneurship PDF

PA R T I ENTREPRENEURIAL GOALS AND CONTEXT The national, regional and sectoral contexts can have a significant influence on the rate and direction of innovation and entrepreneurship through the availability or scarcity of resources, talent, opportunities, infrastructure and support. However, whil...

PA R T I ENTREPRENEURIAL GOALS AND CONTEXT The national, regional and sectoral contexts can have a significant influence on the rate and direction of innovation and entrepreneurship through the availability or scarcity of resources, talent, opportunities, infrastructure and support. However, while context influences the rate and direction, it does not determine outcomes. The education, training, experience and apti- tude of individuals also have a profound effect on the goals and outcomes of innovation and entrepreneurship. Entrepreneurial Recognizing the Finding the Developing the Creating the goals and context opportunity resources venture value Learning  Chapter 1 The Innovation Imperative LEARNING OBJECTIVES By the end of this chapter you will develop an understanding of: what ‘innovation’ and ‘entrepreneurship’ mean – and how they are essential for sur- vival and growth innovation as a process rather than a single flash of inspiration the difficulties in managing what is an uncertain and risky process the key themes in thinking about how to manage this process effectively. Innovation Matters You don’t have to look far before you bump into the innovation imperative. It leaps out at you from a thousand mission statements and strategy documents, each stressing how impor- tant innovation is to ‘our customers/our shareholders/our business/our future’ and, most often, ‘our survival and growth’. Innovation shouts at you from advertisements for products ranging from hairspray to hospital care. It nestles deep in the heart of our history books, pointing out how far and for how long it has shaped our lives. And it is on the lips of every politician, recognizing that our lifestyles are constantly shaped and reshaped by the process of innovation. www.innovation-portal.info 4 Part I Entrepreneurial Goals and Context INNOVATION IN ACTION 1.1 Everybody’s Talking about It ‘We have the strongest innovation programme that I can remember in my 30-year career at P&G, and we are investing behind it to drive growth across our business’ – Bob McDonald, Chairman, President and CEO, Procter & Gamble ‘We believe in making a difference. Virgin stands for value for money, quality, innovation, fun and a sense of competitive challenge. We deliver a quality service by empowering our employees and we facilitate and monitor customer feedback to continually improve the customer’s experience through innovation’ – Virgin Life Care (http://www.virginlifecare.co.za/aboutus/ aboutVirgin.aspx) ‘Adi Dassler had a clear, simple, and unwavering passion for sport. Which is why with the ben- efit of 50 years of relentless innovation created in his spirit, we continue to stay at the forefront of technology’ – Adidas (www.adidas.com) ‘Innovation is our lifeblood’ – Siemens (www.siemens.com) ‘We’re measuring GE’s top leaders on how imaginative they are. Imaginative leaders are the ones who have the courage to fund new ideas, lead teams to discover better ideas, and lead people to take more educated risks’ – J. Immelt, chairman and CEO, General Electric ‘We are always saying to ourselves. We have to innovate. We’ve got to come up with that breakthrough’ – Bill Gates, former chairman and CEO, Microsoft ‘Innovation distinguishes between a leader and a follower’ – Steve Jobs, co-founder and for- mer chairman and CEO, Apple ‘John Deere’s ability to keep inventing new products that are useful to customers is still the key to the company’s growth’ – Robert Lane, CEO, John Deere This isn’t just hype or advertising babble. Innovation does make a huge difference to organizations of all shapes and sizes. The logic is simple: if we don’t change what we offer the world (products and services) and how we create and deliver them, we risk being overtaken by others who do. At the limit it’s about survival, and history is very clear on this point: sur- vival is not compulsory! Those enterprises which survive do so because they are capable of regular and focused change. (It’s worth noting that Bill Gates used to say of Microsoft that it was always only two years away from extinction. Or, as Andy Grove, one of the founders of Intel, pointed out, ‘Only the paranoid survive!’) www.innovation-portal.info  Chapter 1 The Innovation Imperative 5 INNOVATION IN ACTION 1.2 …and It’s a Big Issue OECD countries spend $1500 billion/yr on R&D. More than 16 000 firms in the USA currently operate their own industrial research labs, and there are at least 20 firms that have annual R&D budgets in excess of $1 billion. In 2008, 16.8% of all firms’ turnover in Germany was earned with newly introduced prod- ucts; in the research-intensive sector this figure was 38%. During the same year, the German economy was able to save costs of 3.9% per piece by means of process innovations. ‘Companies that do not invest in innovation put their future at risk. Their business is unlikely to prosper, and they are unlikely to be able to compete if they do not seek innovative solutions to emerging problems’ – Australian government website, 2006. ‘Innovation is the motor of the modern economy, turning ideas and knowledge into products and services’ – UK Office of Science and Technology, 2000. According to Statistics Canada, the following factors characterize successful small and medium-sized enterprises SMEs: 0 Innovation is consistently found to be the most important characteristic associated with success. 0 Innovative enterprises typically achieve stronger growth or are more successful than those that do not innovate. 0 Enterprises that gain market share and increasing profitability are those that are innovative. On the plus side innovation is also strongly associated with growth. New business is created by new ideas, by the process of creating competitive advantage in what a firm can offer. Economists have argued for decades over the exact nature of the relationship but they are generally agreed that innovation accounts for a sizeable proportion of economic growth. William Baumol points out that ‘virtually all of the economic growth that has occurred since the eighteenth century is ultimately attributable to innovation.’1 INNOVATION IN ACTION 1.3 Growth Champions and the Return from Innovation Tim Jones has been studying successful innovating organizations for some time (see http:// growthchampions.org/about-us/). His most recent work has built on this, looking to try to establish a link between those organizations which invest consistently in innovation and their (continued) www.innovation-portal.info 6 Part I Entrepreneurial Goals and Context subsequent performance.2 His findings Audio Clip of an interview with show that over a sustained period of time Tim Jones discussing the link there is a strongly positive link between between innovation and growth is available on the Innovation Portal the two; innovative organizations are at www.innovation-portal.info more profitable and more successful. Survival and growth poses a problem for established players but a huge opportunity for newcomers to rewrite the rules of the game. One person’s problem is another’s opportunity and the nature of innovation is that it is fundamentally about entrepreneurship. The skill to spot opportunities and create new ways to exploit them is at the heart of the innovation process. Entrepreneurs are risk-takers, but they calculate the costs of taking a bright idea forward against the potential gains if they succeed in doing something different – especially if that involves upstaging the players already in the game. INNOVATION IN ACTION 1.4 Global Innovation Performance The consultancy Arthur D. Little conducts a regular survey of senior executives around the world exploring innovation.3 In its 2012 survey of 650 organizations, the following emerged: Top quartile innovation performers obtain on average 13% more profit from new products and services than average performers do, and 30% shorter time-to-break-even, although the gap is narrowing. There is a clear correlation between capability in innovation measurement and innovation success. A number of key innovation management practices have a particularly strong impact on innovation performance across industries. Of course, not all games are about win/lose outcomes. Public services like healthcare, education and social security may not generate profits but they do affect the quality of life for millions of people. Bright ideas when implemented well can lead to valued new services and the efficient delivery of existing ones at a time when pressure on national purse strings is becoming ever tighter. New ideas – whether wind-up radios in Tanzania or micro-credit financing schemes in Bangladesh – have the potential to change the quality of life and the availability of opportunity for people in some of the poorest regions of the world. There’s plenty of scope for innovation and entrepreneurship and sometimes this really is about life and death. Table 1.1 gives some examples. www.innovation-portal.info  Chapter 1 The Innovation Imperative 7 TABLE 1.1 Where innovation makes a difference Innovation is about …. Examples Identifying Innovation is driven by the ability to see connections, to spot opportunities or creating and to take advantage of them. Sometimes this is about completely new opportunities possibilities, for example by exploiting radical breakthroughs in technology. New drugs based on genetic manipulation have opened a major new front in the war against disease. Mobile phones, tablets and other devices have revolutionized where and when we communicate. Even the humble window pane is the result of radical technological innovation – almost all the window glass in the world is made these days by the Pilkington float glass process which moved the industry away from the time-consuming process of grinding and polishing to get a flat surface Case Study of James Dyson and his innovation-led business is available on the Innovation Portal at www.innovation-portal.info New ways Innovation isn’t just about opening up new markets; it can also offer new of serving ways of serving established and mature ones. Low-cost airlines are still existing about transportation, but the innovations firms like Southwest Airlines, markets easyJet and Ryanair have introduced have revolutionized air travel and grown the market in the process. Despite a global shift in textile and clothing manufacture towards developing countries, the Spanish company Inditex (through its retail outlets under various names, including Zara) has pioneered a highly flexible, fast turnaround clothing operation with over 2000 outlets in 52 countries. It was founded by Amancio Ortega Gaona, who set up a small operation in the west of Spain in La Coruña – a region not previously noted for textile production – and the first store opened there in 1975. The company now has over 5000 stores worldwide and is the world’s biggest clothing retailer; significantly, it is also the only manufacturer to offer specific collections for northern and southern hemisphere markets. Central to the Inditex philosophy is close linkage between design, manufacture and retailing and its network of stores constantly feeds back information about trends, which are used to generate new designs. It also experiments with new ideas directly on the public, trying samples of cloth or design and quickly getting back indications of what is going to catch on. Despite its global orientation, most manufacturing is still done in Spain, and it has managed to reduce the turnaround time between a trigger signal for an innovation and responding to it to around 15 days (continued) www.innovation-portal.info 8 Part I Entrepreneurial Goals and Context TABLE 1.1 (Continued) Innovation is about …. Examples Case Study of Zara and how it has used innovation around design and ‘fast fashion’ to create new opportunities in a crowded and mature marketplace is available on the Innovation Portal at www.innovation-portal.info Growing new Equally important is the ability to spot where and how new markets can markets be created and grown. Alexander Bell’s invention of the telephone didn’t lead to an overnight revolution in communications – that depended on developing the market for person-to-person communications. Henry Ford may not have invented the motor car but in making the Model T – ‘a car for Everyman’ at a price most people could afford – he grew the mass market for personal transportation. And eBay justifies its multi-billion-dollar price tag not because of the technology behind its online auction idea but because it created and grew the market Case Study of the Model T Ford is available on the Innovation Portal at www.innovation-portal.info Rethinking In most economies the service sector accounts for the vast majority of services activity, so there is likely to be plenty of scope. And the lower capital costs often mean that the opportunities for new entrants and radical change are greatest in the service sector. Online banking and insurance have become commonplace but they have radically transformed the efficiencies with which those sectors work and the range of services they can provide. New entrants riding the Internet wave have rewritten the rule book for a wide range of industrial games, for example Amazon in retailing, eBay in market trading and auctions, Google in advertising and Skype in telephony Case Study of Alibaba and the Taobao online shopping mall, one of the world’s top ten most visited websites, is available on the Innovation Portal at www.innovation-portal.info www.innovation-portal.info  Chapter 1 The Innovation Imperative 9 TABLE 1.1 (Continued) Innovation is about …. Examples Meeting Innovation offers huge challenges – and opportunities – for the public social needs sector. Pressure to deliver more and better services without increasing the tax burden is a puzzle likely to keep many civil servants awake at night. But it’s not an impossible dream: right across the spectrum there are examples of innovation changing the way the sector works. For example, in healthcare there have been major improvements in efficiencies around key targets such as waiting times. Hospitals like the Leicester Royal Infirmary in the UK or the Karolinska Hospital in Stockholm, Sweden have managed to make radical improvements in the speed, quality and effectiveness of their care services, such as cutting waiting lists for elective surgery by 75% and cancellations by 80%, through innovation Case Studies of innovation in public services, Karolinska Hospital, Aravind Eye Clinics and Narayana Hrudayalaya Hospitals (NHL), are available on the Innovation Portal at www.innovation-portal.info Improving At the other end of the scale Kumba Resources is a large South African operations – mining company which makes another dramatic claim: ‘We move doing what mountains.’ In Kumba’s case, the mountains contain iron ore and the we do but company’s huge operations require large-scale excavation – and restitution better of the landscape afterwards. Much of its business involves complex large- scale machinery – and its ability to keep it running and productive depends on a workforce able to contribute innovative ideas on a continuing basis Case Study of Kumba’s innovation activities is available on the Innovation Portal at www.innovation-portal.info INNOVATION IN ACTION 1.5 Finding Opportunities When the Tasman Bridge collapsed in Hobart, Tasmania in 1975, Robert Clifford was run- ning a small ferry company and saw an opportunity to capitalize on the increased demand (continued) www.innovation-portal.info 10 Part I Entrepreneurial Goals and Context for ferries – and to differentiate his by selling drinks to thirsty cross-city commuters. The same entrepreneurial flair later helped him build a company – Incat – that pioneered the wave-piercing design which helped the company capture over half the world market for fast catamaran ferries. Continuing investment in innovation has helped this company from a relatively isolated island build a key niche in highly competitive international military and civilian markets. ‘We always eat elephants’ is a surprising claim made by Carlos Broens, founder and head of a successful tool-making and precision engineering firm in Australia with an enviable growth record. Broens Industries is a small/medium-sized company of 130 employees which survives in a highly competitive world by exporting over 70% of its products and services to technologically demanding firms in aerospace, medical and other advanced markets. The quote doesn’t refer to strange dietary habits but to the company’s confidence in ‘taking on the challenges normally seen as impossible for firms of our size’ – a capabil- ity which is grounded in a culture of innovation in products and the processes that go to produce them. There has always been a need for artificial limbs and the demand has, sadly, significantly increased as a result of high-technology weaponry such as mines. The problem is compounded by the fact that many of those requiring new limbs are also in the poorest regions of the world and unable to afford expensive prosthetics. The chance meeting of a young surgeon, Dr Pramod Karan Sethi, and a sculptor, Ram Chandra, in a hospital in Jaipur, India has led to the development of a solution to this problem: the Jaipur Foot. This artificial limb was developed using Chandra’s skill as a sculptor and Sethi’s expertise and is so effective that those who wear it can run, climb trees and pedal bicycles. It was designed to make use of low-tech materials and be simple to assemble, for example in Afghanistan craftsmen hammer the foot together out of spent artillery shells, while in Cambodia part of the foot’s rubber components are scavenged from truck tyres. Perhaps the greatest achievement has been to do all of this for a low cost: the Jaipur Foot costs only $28 in India. Since 1975, nearly one million people worldwide have been fitted for the Jaipur limb and the design is being developed and refined, for example using advanced new materials. Not all innovation is necessarily good for everyone. One of the most vibrant entrepreneurial communities is in the criminal world where there is a constant search for new ways of com- mitting crime without being caught. The race between the forces of crime and law and order is a powerful innovation arena – as work by Howard Rush and colleagues have shown in their studies of cybercrime. Case Study detailing a report on cybercrime is available on the Innovation Portal at www.innovation-portal.info www.innovation-portal.info  Chapter 1 The Innovation Imperative 11 Innovation and Entrepreneurship Innovation matters – but it doesn’t happen automatically. It is driven by entrepreneurship – a potent mixture of vision, passion, energy, enthusiasm, insight, judgement and plain hard work which enables good ideas to become reality. The power behind changing products, processes and services comes from individuals – whether acting alone or embedded within organizations – who make innovation happen. As the famous management writer Peter Drucker put it:4 Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or service. It is capable of being presented as a discipline, capable of being learned, capable of being practised. INNOVATION IN ACTION 1.6 Joseph Schumpeter One of the most significant figures in this area of economic theory was Joseph Schumpeter, who wrote extensively on the subject. He had a distinguished career as an economist and served as Minister for Finance in the Austrian government. His argument was simple: entrepreneurs will seek to use technological innovation – a new product/service or a new process for making it – to get strategic advantage. For a while, this may be the only example of the innovation so the entre- preneur can expect to make a lot of money – what Schumpeter calls ‘monopoly profits’. But of course, other entrepreneurs will see what he has done and try to imitate it – with the result that other innovations emerge, and the resulting ‘swarm’ of new ideas chips away at the monopoly profits until an equilibrium is reached. At this point the cycle repeats itself: our original entrepre- neur or someone else looks for the next innovation that will rewrite the rules of the game, and off we go again. Schumpeter talks of a process of ‘creative destruction’, where there is a constant search to create something new which simultaneously destroys the old rules and establishes new ones – all driven by the search for new sources of profits. In his view ‘[what counts is] competition from the new commodity, the new technology, the new source of supply, the new type of organization … competition which … strikes not at the mar- gins of the profits and the outputs of the existing firms but at their foundations and their very lives.’5 Entrepreneurship plays out on different stages in practice. One obvious example is the start-up venture in which the lone entrepreneur takes a calculated risk to bring something new into the world. But entrepreneurship matters just as much to the established organiza- tion which needs to renew itself in what it offers and how it creates and delivers that offering. Internal entrepreneurs – often labelled as ‘intrapreneurs’ or working in ‘corporate entrepre- neurship’ or ‘corporate venture’ departments – provide the drive, energy and vision to take risky new ideas forward within that context.6 And of course, the passion to change things may www.innovation-portal.info 12 Part I Entrepreneurial Goals and Context not be focused on creating commercial value but rather on improving conditions or enabling change in the wider social sphere or in the direction of environmental sustainability – a field which has become known as ‘social entrepreneurship’ (see Chapter 2). This idea of entrepreneurship driving innovation to create value – social and com- mercial – across the lifecycle of organizations is central to this book. Table 1.2 gives some examples. In the rest of the book, we use this lens to look at managing innovation and entrepreneur- ship. We’ll use three core concepts: innovation. As a process which can be organized and managed, whether in a start-up ven- ture or in renewing a 100-year-old business entrepreneurship. As the motive power to drive this process through the efforts of passion- ate individuals, engaged teams and focused networks creating value. As the purpose for innovation, whether expressed in financial terms, employ- ment or growth, sustainability or improvement of social welfare. TABLE 1.2 Entrepreneurship and innovation Stage in lifecycle of an organization Start-up Growth Sustain/scale Renew Creating Individual Growing the Building a Returning to the commercial entrepreneur business portfolio of radical frame- value exploiting through adding incremental breaking kind new technol- new products/ and radical of innovation ogy or market services or innovation to which began the opportunity moving into sustain the business and new markets business and/ enables it to or spread its move forward as influence into something very new markets different Creating social Social Developing Spreading the Changing the value entrepreneur, the ideas and idea widely, system – and passionately engaging diffusing it to then acting as concerned others in a other commu- agent for the to improve network for nities of social next wave of or change change – entrepreneurs, change something in perhaps in engaging links their immediate a region or with main- environment around a key stream players issue like public sec- tor agencies www.innovation-portal.info  Chapter 1 The Innovation Imperative 13 Innovation Isn’t Easy! Coming up with good ideas is what human beings are good at – we have this facility already fitted as standard equipment in our brains! But taking those ideas forward is not quite so simple, and most new ideas fail. It takes a particular mix of energy, insight, belief and determi- nation to push against these odds; it also requires judgement to know when to stop banging against the brick wall and move on to something else. It’s important here to remember a key point: new ventures often fail, but it is the ventures which are failures rather than the people who launched them. Successful entrepreneurs recognize that failure is an intrinsic part of the process. They learn from their mistakes, understanding where and when timing, market conditions, technological uncertainties, etc. mean that even a great idea isn’t going to work. But they also recognize that the idea may have had its weaknesses but that they have not failed themselves but rather learnt some useful insights to carry over to their next venture. INNOVATION IN ACTION 1.7 Failure Breeds Success Thomas Edison was a pretty successful entrepreneur with over 1000 patents to his name and the reputation for bringing many key technologies into widespread use, including the phonograph, the electric telegraph and the light bulb; he also founded the General Electric Company, which is still a major player today. He is famous for his attitude towards failure, typified by the search for the right material to make the filament for his incandescent light bulb, where he explored over 1000 different options. He is reported as having said that the process did not involve failure so much as ‘the elimination of a design that didn’t work, so we must be getting close’. While the road for an individual entrepreneur may be very rocky with a high risk of hit- ting potholes, running into roadblocks or careering off the edge, it doesn’t get any easier if you are a large established company. It’s a disturbing thought but the majority of companies have a lifespan significantly less than that of a human being. Even the largest firms can show worrying signs of vulnerability, and for the smaller firm the mortality statistics are bleak. Many SMEs fail because they don’t see or recognize the need for change. They are inward looking, too busy fighting fires and dealing with today’s crises to worry about storm clouds on the horizon. Even if they do talk to others about the wider issues, it is very often to people in the same network and with the same perspectives, for example the people who supply them with goods and services or their immediate customers. The trouble is that by the time they realize there is a need to change it may be too late. But it isn’t just a small firm problem. There is no guaranteed security in size or in previ- ous technological success. Take the case of IBM – a giant firm which can justly claim to have laid the foundations of the IT industry and came to dominate the architecture of hardware www.innovation-portal.info 14 Part I Entrepreneurial Goals and Context and software and the ways in which computers were marketed. But such core strength can sometimes become an obstacle to seeing the need for change – as proved to be the case when, in the early 1990s, the company moved too slowly to counter the threat of networking tech- nologies – and nearly lost the business in the process. Thousands of jobs and billions of dol- lars were lost and it took years of hard work to bring the share price back to the high levels which investors had come to expect. One problem for successful companies occurs when the very things which helped them achieve success – their ‘core competencies’ – become the things which make it hard to see or accept the need for change. Sometimes the response is ‘not invented here’: the new idea is recognized as good but in some way not suited to the business. INNOVATION IN ACTION 1.8 The ‘Not Invented Here’ Problem A famous example of ‘not invented here’ was the case of Western Union, which, in the 19th cen- tury, was probably the biggest communications company in the world. It was approached by one Alexander Graham Bell, who wanted the company to consider helping him commercialize his new invention. After mounting a demonstration to senior executives, he received a written reply which said, ‘after careful consideration of your invention, which is a very interesting novelty, we have come to the conclusion that it has no commercial possibilities … We see no future for an electrical toy.’ Within four years of the invention, there were 50 000 telephones in the USA and within 20 years five million. Over the next 20 years, the company which Bell formed grew to become the largest corporation in the USA. Sometimes the pace of change appears slow and the old responses seem to work well. It appears, to those within the industry that they understand the rules of the game and have a good grasp of the relevant technological developments likely to change things. But what can sometimes happen here is that change comes along from outside the industry – and by the time the main players inside have reacted it is often too late. INNOVATION IN ACTION 1.9 The Melting of the Ice Industry In the late 19th century, there was a thriving industry in New England based upon the harvesting and distribution of ice. In its heyday, it was possible for ice harvesters to ship hundreds of tons of ice around the world on voyages that lasted as long as six months – and still have over half www.innovation-portal.info  Chapter 1 The Innovation Imperative 15 the cargo available for sale. By the late 1870s, the 14 major firms in the Boston area of the USA were cutting around Case Study of the ice industry is available on the Innovation Portal 700 000 tons per year and employing at www.innovation-portal.info several thousand people. But the industry was completely overthrown by the new developments which followed from the invention of refrigeration and the growth of the modern cold storage industry. Of course, for others these conditions provide an opportunity for moving ahead of the game and writing a new set of rules. Think about what has happened in online banking, call-centre-linked insurance or low-cost airlines. In each case, the existing stable pattern has been overthrown, disrupted by new entrants coming in with new and challenging business models. For many managers business model innovation is seen as the biggest threat to their competitive position, precisely because they need to learn to let go of their old models as well as learn new ones. We also need to see that while for established organizations these crises are a problem, they represent a rich source of opportunity for entrepreneurs looking to disrupt an established order and create value in new ways. In many cases the individual enterprise can renew itself, adapting to its environment and moving into new Case Study of how innovation has things. Consider the example of the Stora company helped a 100-year-old company, in Sweden: founded in the 13th century as a timber Marshalls, develop and grow is cutting and processing operation it still thrives today – available on the Innovation Portal at albeit in the very different areas of food processing and www.innovation-portal.info electronics. All of these examples point to the same conclusion. Organizations need entrepreneurship at all stages in their lifecycle, from start-up to long- lived survival. The ability to recognize opportunities, pull resources together in creative ways, implement good ideas and capture the value from them are core skills. Managing Innovation and Entrepreneurship The dictionary defines ‘innovation’ as ‘change’; it comes from Latin in and novare, meaning ‘to make something new’. That’s a bit vague if we’re trying to manage it; perhaps a more useful defi- nition would be ‘the successful exploitation of new ideas’. Those ideas don’t necessarily have to be completely new to the world, or particularly radical; as one definition has it: ‘innovation does not necessarily imply the commercialization of only a major advance in the technological state of the art (a radical innovation) but it includes also the utilization of even small-scale changes in www.innovation-portal.info 16 Part I Entrepreneurial Goals and Context technological know-how (an improvement or incremental innovation).’7 Whatever the nature of the change the key issue is how to bring it about, in other words how to manage innovation. Can we do it? One answer comes from the experiences of organizations that have survived for an extended period of time. While most organizations have comparatively modest lifes- pans, some have survived at least one and sometimes multiple centuries. Looking at the expe- rience of these ‘100 club’ members – firms like 3M, Corning, Procter and Gamble, Reuters, Siemens, Philips and Rolls-Royce – we can see that Case Studies about long-term much of their longevity is down to having developed a innovation success in businesses, capacity to innovate on a continuing basis. They have 3M, Corning and Philips Lighting, are learnt, often the hard way, how to manage the process available on the Innovation Portal at and, importantly, how to repeat the trick. Any organiza- www.innovation-portal.info tion can get lucky once but sustaining it for a century or more suggests there’s a bit more to it than that. It’s the same with individuals: ‘serial entrepreneurs’ may start many different businesses and what they bring to the party is an accumulated understanding of how to do it better. They have learnt and built long-term capability into a robust set of skills. Over the past hundred years, there have been many attempts to answer the question of whether we can manage innovation. Researchers have looked at case examples, at sectors, at entrepreneurs, at big firms and small firms, at success and failure. Practising entrepreneurs and innovation managers in large businesses have tried to reflect on the ‘how’ of what they do. The key messages come from the world of experience. What we’ve learnt comes from the laboratory of practice rather than some deeply rooted theory. The key messages from this knowledge base are that successful innovators: explore and understand different dimensions of innovation (ways in which we can change things) manage innovation as a process create conditions to enable them to repeat the innovation trick (building capability) focus this capability to move their organizations forward (innovation strategy) build dynamic capability (the ability to rest and adapt their approaches in the face of a changing environment). In the following sections we’ll explore each of these themes in a little more detail. Dimensions of Innovation: What Can We Change? One approach to finding an answer to the question of where we could innovate is to use a kind of ‘innovation compass’ exploring different possible directions. Innovation can take many forms but we can map the options along four dimensions, as shown in Table 1.3. www.innovation-portal.info  Chapter 1 The Innovation Imperative 17 TABLE 1.3 Dimensions for innovation8 Dimension Type of change Product Changes in the things (products/services) an organization offers Process Changes in the ways these offerings are created and delivered Position Changes in the context into which the products/services are introduced Paradigm Changes in the underlying mental models which frame what the organization does For example, a new design of car, a new insurance package for accident-prone babies and a new home-entertainment system would all be examples of product innovation. And change in the manufacturing methods and equipment used to produce the car or the home- entertainment system, or in the office procedures and sequencing in the insurance case, would be examples of process innovation. Sometimes the dividing line is somewhat blurred. For example, a new jet-powered sea ferry is both a product and a process innovation. Services represent a particular case of this where the product and process aspects often merge. For example, is a new holiday package a product or process change? Innovation can also take place by repositioning the perception of an established product or process in a particular user context. For example, an old-established product in the UK is Lucozade, originally developed as a glucose-based drink to help children and invalids in con- valescence. These associations with sickness were abandoned by the brand owner, Beechams (part of GlaxoSmithKline), when it relaunched the product as a health drink aimed at the growing fitness market, where it is now presented as a performance-enhancing aid to healthy exercise. In 2014, the brand was sold to Suntory for around $1.35bn. This shift is a good example of ‘position’ innovation. In similar fashion Häagen Dazs created a new market for ice cream, essentially targeted at adults, through position innovation rather than changing the product or core manufacturing process. Sometimes opportunities for innovation emerge when we reframe the way we look at something. Henry Ford fundamentally changed the face of transportation not because he invented the motor car (he was a comparative latecomer to the new industry) or because he developed the manufacturing process to put one together (as a craft-based specialist industry car-making had been established for around 20 years). His contribution was to change the underlying model from one which offered a hand-made specialist product to a few wealthy customers to one which offered a car for Everyman at a price he could afford. The ensuing shift from craft to mass production was nothing short of a revolution in Video Clip about the Model T Ford is the way cars (and later countless other products and available on the Innovation Portal at services) were created and delivered. Of course, mak- www.innovation-portal.info ing the new approach work in practice also required www.innovation-portal.info 18 Part I Entrepreneurial Goals and Context extensive product and process innovation, for example in component design, in machinery building, in factory layout and particularly in the social system around which work was organized. Examples of ‘paradigm’ innovation – changes in mental models – include the shift to low- cost airlines, the provision of online insurance and other financial services and the reposition- ing of drinks like coffee and fruit juice as premium ‘designer’ products. They involve a shift in the underlying vision about how innovation can create social or commercial value. The term ‘business model’ is increasingly used and this is another way of thinking about ‘paradigm innovation’. We explore this theme in detail in Chapter 16. Table 1.4 gives some examples of paradigm innovation. TABLE 1.4 Examples of paradigm innovation Business model innovation How it changes the rules of the game ‘Servitization’ Traditionally, manufacturing was about producing and then selling a product. But, increasingly, manufacturers are bundling various support services around their prod- ucts, particularly for major capital goods. Rolls-Royce, the aircraft engine maker, still produces high-quality engines but it has an increasingly large business around services to ensure those engines keep delivering power over the 30-plus-year life of many aircraft. Caterpillar, the specialist machinery company, now earns as much from service con- tracts, which help keep its machines running productively, as it does from the original sale Ownership to rental Spotify is one of the most successful music-streaming companies with around eight million subscribers. It shifted the model from people’s desire to own the music they listened to towards one in which they rented access to a huge library of music. In similar fashion, Zipcar and other car rental businesses have transformed the need for car ownership in many large cities Offline to online Many businesses have grown up around the Internet and enabled substitution of physical encounters, for example in retailing, with virtual ones Mass customization and New technologies and a growing desire for customiza- co-creation tion have enabled the emergence not only of personalized products but platforms on which users can engage and co-create everything from toys (e.g. Lego), clothing (e.g. Adidas) to complex equipment like cars (Local Motors). www.innovation-portal.info  Chapter 1 The Innovation Imperative 19 TABLE 1.4 (Continued) Business model innovation How it changes the rules of the game Case Studies of these companies are available on the Innovation Portal at www.innovation-portal.info Experience innovation Moving from commodity through offering a service towards creating an experience around a core product, for example Starbucks making a coffee shop into a place where people can meet and chat, use Wi-Fi, read books and do a host of activities as well as buy and drink coffee. Paradigm innovation can be triggered by many different things: new technologies, the emergence of Video Clip of Finnegan’s Fish Bar showing the ideas around 4Ps model new markets with different value expectations, new applied to a simple food business is legal rules of the game, new environmental conditions available on the Innovation Portal at (climate change, energy crises), etc. For example, the www.innovation-portal.info emergence of Internet technologies made possible a complete reframing of how we carry out many busi- nesses. In the past, similar revolutions in thinking were triggered by technologies like steam power, electricity, Tool to help you explore the 4Ps mass transportation (via railways and, with motor cars, approach is available on the roads) and microelectronics. And it seems very likely Innovation Portal at that similar reframing will happen as we get to grips www.innovation-portal.info with new technologies like nanotechnology or genetic engineering. From Incremental to Radical Innovation… Another thing to think about is the degree of novelty involved. Clearly, updating the styling on our car is not Activities to explore incremental the same as coming up with a completely new concept car and radical innovation are available which has an electric engine and is made of new composite on the Innovation Portal at www.innovation-portal.info materials as opposed to steel and glass. Similarly, increas- ing the speed and accuracy of a lathe is not the same thing www.innovation-portal.info 20 Part I Entrepreneurial Goals and Context as replacing it with a computer-controlled laser forming process. There are degrees of novelty in these, running from minor, incremental improvements right through to radical changes, which transform the way we think about and use them. Sometimes these changes are com- mon to a particular sector or activity, but sometimes they are so radical and far-reaching that they change the basis of society, for example the role played by steam power in the Industrial Revolution or the ubiquitous changes resulting from today’s communications and computing technologies. …to Components and Systems Innovation is often like a set of Russian dolls: we can change things at the level of components or we can change a whole system. For example, we can put a faster transistor on a microchip on a circuit board for the graphics display in a computer. Or we can change the way several boards are put together into the computer to give it particular capabilities – a games box, an e-book, a media PC. Or we can link the computers into a network to drive a small business or office. Or we can link the networks to others into the Internet. There’s scope for innova- tion at each level – but changes in the higher-level systems often have implications for lower down. For example, if cars, as a complex assembly, were suddenly designed to be made out of plastic instead of metal, it would still leave scope for car assemblers but would pose some sleepless nights for producers of metal components! Figure 1.1 illustrates the range of choices, highlighting the point that such change can happen at the component or sub-system level or across the whole system. SYSTEM LEVEL New generations New versions e.g. MP3 and Steam power, of motor car, download vs. ICT ‘revolution’, aeroplane, TV CD and bio-technology cassette music Advanced New components materials to Improvements for existing improve to components systems component performance COMPONENT LEVEL INCREMENTAL RADICAL (‘doing what (‘new to the (‘new to we do better’) enterprise’) the world’) FIGURE 1.1 Types of innovation www.innovation-portal.info  Chapter 1 The Innovation Imperative 21 A Process Model for Innovation and Entrepreneurship Rather than the cartoon image of a light bulb flashing on above someone’s head, we need to think about innovation as an extended sequence of activities – as a process. Whether we are looking at an individual entrepreneur bringing their idea into action or a multi-million-dollar corporation launching the latest in a stream of new products, the same basic framework applies. We can break it down to the four key steps we mentioned earlier: recognizing the opportunity finding the resources developing the idea capturing value. Figure 1.2 illustrates this model. Recognizing the Opportunity Innovation triggers come in all shapes and sizes and from all sorts of directions. They could take the form of new technological opportunities or changing requirements on the part of markets. They could be the result of legislative pressure or competitor action. They could be a bright idea occurring to someone as they sit, Archimedes-like, in their bathtub. They could come as a result of buying in a good idea from someone outside the organization. Or they could arise from dissatisfaction with social conditions or a desire to make the world a better place in some way. Entrepreneurial Recognizing the Finding the Developing the Creating the goals and context opportunity resources venture value Learning FIGURE 1.2 A model of the entrepreneurial process www.innovation-portal.info 22 Part I Entrepreneurial Goals and Context The message here is clear: if we are going to pick up these trigger signals then we need to develop some pretty extensive antennae for searching and scanning around us – and that includes some capability for looking into the future. Finding the Resources The trouble with innovation is that it is by its nature a risky business. You don’t know at the outset whether what you decide to do is going to work out or even that it will run at all. Yet you have to commit some resources to begin the process. So how do you build a portfolio of projects which balance the risks and the potential rewards? (Of course, this decision is even tougher for the first-time entrepreneur trying to launch a business based on his or her great new idea – the choice there is whether to go forward and commit what may be a huge investment of personal time, the mortgage, family life, etc. Even if they succeed, there is then the problem of trying to grow the business and needing to develop more good ideas to follow the first.) So this stage is very much about strategic choices. Does the idea fit a business strategy, does it build on something we know about (or where we can get access to that knowledge easily) and do we have the skills and resources to take it forward? And if we don’t have those resources, which is often the case with the lone entrepreneur at start-up, how will we find and mobilize them? Developing the Idea Having picked up relevant trigger signals, made a strategic decision to pursue some of them and found and mobilized the resources we need, the next key phase is actually turning those potential ideas into some kind of reality. In some ways this implementation phase is a bit like making a kind of ‘knowledge tapestry’, by gradually weaving the different threads of knowledge (about technologies, markets, competitor behaviour, etc.) into a successful innovation. Early on it is full of uncertainty but gradually the picture becomes clearer – but at a cost. We have to invest time and money and find people to research and develop ideas and conduct market studies, competitor analysis, prototyping, testing, etc. in order to gradually improve our understanding of the innovation and whether it will work. Eventually, it is in a form which can be launched into its intended context – an internal or external market – and then further knowledge about its adoption (or otherwise) can be used to refine the innovation. Developing a robust business plan which takes all of this into consideration at the outset is one of the key elements in entrepreneurial success. Throughout this implementation phase, we have to balance creativity – finding bright ideas and new ways to get around the thousand and one problems which emerge and get the bugs out of the system – with control – making sure we keep to some kind of budget on time, money and resources. This balancing act means that skills in project management around innovation, with all its inherent uncertainties, are always in high demand! This phase is also where we need to bring together different knowledge sets from many different people – so combining them in ways which help rather than hinder the process and raise big questions around teambuilding and management. It would be foolish to throw good money after bad, so most organizations make use of some kind of risk management as they implement innovation projects. By installing a series of ‘gates’ as the project moves from a gleam in the eye to an expensive commitment of time and money, it becomes possible to review and if necessary redirect or even stop something which is going off www.innovation-portal.info  Chapter 1 The Innovation Imperative 23 the rails. For the solo entrepreneur it is in this stage that judgement is needed – and sometimes the courage to know when to stop and move on, to let go and start again on something else. Eventually, the project is launched into some kind of marketplace: externally, people who might use the product or service or, internally, people who make the choice about whether to buy into the new process being presented to them. Either way, we don’t have a guarantee that just because the innovation works and we think it the best thing since sliced bread they will feel the same way. Innovations diffuse across user populations over time. Usually, the process follows some kind of S-curve shape. A few brave souls take on the new idea and then gradually, assuming it works for them, others get on the bandwagon until finally there are just a few diehards (lag- gards) who resist the temptation to change. Managing this stage well means we need to think ahead about how people are likely to react and build these insights into our project before we reach the launch stage – or else work hard at persuading them after we have launched it! Capture Value Despite all our efforts in recognizing opportunities, finding resources and developing the venture, there is no guarantee we will be able to capture the value from all our hard work. We also need to think about, and manage, the process to maximize our chances – through protecting our intellectual property and the financial returns if we are engaged in commercial innovation or in scaling and spreading our ideas for social change so that they are sustainable and really do make a difference. We also have an opportunity at the end of an innovation project to look back and reflect on what we have learnt and how that knowledge could help us do things better next time. In other words, we could capture valuable learning about how to build our innovation capability. The Context of Success It’s all very well putting a basic process for turning ideas into reality in place. But it doesn’t take place in a vacuum. It is subject to a range of internal and external influences that shape what is possible and what actually emerges. This process doesn’t take place in a vacuum; it is shaped and influenced by a variety of factors. In particular, innovation needs: Clear strategic leadership and direction, plus the commitment of resources to make this happen. Innovation is about taking risks, about going into new and sometimes completely unexplored spaces. We don’t want to gamble, simply changing things for their own sake or because the fancy takes us. No organization has resources to waste in that scattergun fashion: innovation needs a strategy. But, equally, we need to have a degree of courage and leadership, steering the organiza- tion away from what everyone else is doing or what we’ve always done and towards new spaces. In the case of the individual entrepreneur this challenge translates to one in which a clear personal vision can be shared in ways which engage and motivate others to buy into it and to contribute their time, energy, money, etc. to help make it happen. Without a com- pelling vision, it is unlikely the venture will get off the ground. An innovative organization in which the structure and climate enables people to deploy their creativity and share their knowledge to bring about change. It’s easy to find prescrip- tions for innovative organizations which highlight the need to eliminate stifling bureau- cracy, unhelpful structures, brick walls blocking communication and other factors stopping good ideas getting through. But we must be careful not to fall into the chaos trap. Not all www.innovation-portal.info 24 Part I Entrepreneurial Goals and Context innovation works in organic, loose, informal environments or ‘skunk works’; indeed, these types of organization can sometimes act against the interests of successful innovation. We need to determine appropriate organization, that is the most suitable organization given the operating contingencies. Too little order and structure may be as bad as too much. This is one area where start-ups often have a major advantage – by definition they are small organizations (often one-person ventures) with a high degree of communication and cohesion. They are bound together by a shared vision and they have high levels of coopera- tion and trust, giving them enormous flexibility. But the downside of being small is a lack of resources, and so successful start-ups are very often those which can build a network around them through which they can tap into the key resources they need. Building and managing such networks is a key factor in creating an extended form of organization. Proactive links across boundaries inside the organization and to the many external agen- cies who can play a part in the innovation process: suppliers, customers, sources of finance, skilled resources and of knowledge, etc. Twenty-first-century innovation is most certainly not a solo act but a multiplayer game across boundaries inside the organization and to the many external agencies who can play a part in the innovation process. These days it’s about a global game and one where connections and the ability to find, form and deploy crea- tive relationships is of the essence. Once again, this idea of successful lone entrepreneurs and small-scale start-ups as network builders is critical. It’s not necessary to know or have everything to hand but to know where and how to get it. Figure 1.3 shows the resulting model: what we need to pay attention to if we are going to manage innovation well. Strategic vision and direction Pro-active linkages Entrepreneurial Recognizing the Finding the Developing the Creating the goals and context opportunity resources venture value Learning Innovative organization FIGURE 1.3 The resulting model: What we need to pay attention to if we are going to manage innovation well www.innovation-portal.info  Chapter 1 The Innovation Imperative 25 How Can We Make Change Happen? What are the actions involved in innovation and how can we use this understanding to help us manage the process better? What comes into our minds when we think of innovation tak- ing place? INNOVATION IN ACTION 1.10 Making Ideas Happen If someone asked you, ‘When did you last use your Spengler?’ they might well be greeted by a quizzical look. But if they asked you when you last used your ‘Hoover’, the answer would be fairly easy. Yet it was not Mr Hoover who invented the vacuum cleaner in the late 19th century but one J. Murray Spengler. Hoover’s genius lay in taking that idea and making it a commercial reality. In similar vein, the father of the modern sewing machine was not Mr Singer, whose name jumps to mind and is emblazoned on millions of machines all round the world. It was Elias Howe, who invented the machine in 1846 and Singer who brought it to technical and commer- cial fruition. Perhaps the godfather of them all in terms of turning ideas into reality was Thomas Edison, who during his life registered over 1000 patents. Products for which his organization was responsible include the light bulb, 35mm cinema film and even the electric chair. Many of the inventions for which he is famous weren’t in fact invented by him – the electric light bulb, for example – but were developed and polished technically and their markets opened up by Edison and his team. More than anyone else Edison understood that invention is not enough – simply having a good idea is not going to lead to its widespread adoption and use. One of the problems we have in managing anything is that how we think about it shapes what we do about it. So if we have a simplistic model of how innovation works, for example that it’s just about invention, that’s what we will organize and manage. We may end up with the best invention department in the world, but there is no guarantee that people will ever actually want any of our wonderful inventions! If we are serious about managing innovation, we need to check on our mental models and make sure we’re working with as complete a picture as possible. Otherwise, we run risks like those in Table 1.5. Configuring the Innovation Process: Building Capability Whatever their size or sector, all organizations are trying to find ways of managing this pro- cess of growth and renewal. There is no right answer: every organization needs to aim for the most appropriate solution for its particular circumstances. They develop their own particular ways of doing things and some work better than others. Any organization can get lucky once but the real skill in innovation management is being able to repeat the trick. And while there www.innovation-portal.info 26 Part I Entrepreneurial Goals and Context TABLE 1.5 The problem with partial models If innovation is only seen as… …the result can be Strong R&D capability Technology which fails to meet user needs and may not be accepted: ‘the better mousetrap nobody wants’ The province of spe- Lack of involvement of others, and a lack of key knowledge and cialists in white coats experience input from other perspectives in the R&D laboratory Meeting customer Lack of technical progression, leading to inability to gain competi- needs tive edge Technological Producing products the market does not want or designing pro- advances cesses which do not meet the needs of the user and are opposed The province of large Weak small firms with too high a dependence on large customers firms Breakthrough changes Neglect of the potential of incremental innovation. Also an inability to secure and reinforce the gains from radical change because the incremental performance ratchet is not working well Associated with key Failure to utilize the creativity of the remainder of employees, and individuals to secure their inputs and perspectives to improve innovation Internally generated The ‘not invented here’ effect, where good ideas from outside are resisted or rejected Externally generated Innovation becomes simply a matter of filling a shopping list of needs from outside and there is little internal learning or develop- ment of technological competence are no guarantees, there is plenty of evidence to suggest that firms can and do learn to manage the process for success, by consciously building and developing their innovation capability. These issues apply across the board, though solutions to them may take us in different directions depending on where we start from. A start-up business may not need much in the way of a formal and structured process for organizing and managing innovation. But a firm the size of Nokia will need to pay careful attention to structures and procedures for building a strategic portfolio of projects to explore and for managing the risks as the project moves from ideas into technical and commercial reality. Equally, a large firm may have extensive resources to build a global set of networks to support its activities, whereas a start-up may be vulnerable to threats from elements in its environment it simply didn’t know about, never mind being connected to. This core process runs through any successful innovation, from a lone entrepreneur right up to IBM or GlaxoSmithKline. Of course, making the model work in practice requires con- figuring it for different situations, for example in a large company ‘recognizing the oppor- tunity’ may involve a large R&D department, a market research team, a design studio, etc., www.innovation-portal.info  Chapter 1 The Innovation Imperative 27 whereas all of this could go on in a lone entrepreneur’s head. Finding the resources may involve bringing different departments together in a large organization, but a lone innovator will have to create networks. Attracting support may involve a lone entrepreneur making a pitch to venture capitalists, whereas in a large organization the business case may be put to a monthly project portfolio meeting. Allowing for the fact that we will organize and manage in different ways depending on different kinds of organizations, it is still possible to identify some generic recipes or condi- tions that help the innovation process to happen effectively. As we mentioned earlier, there has been plenty of research around this question and the Further Reading and Resources sec- tion at the end of the chapter lists some good examples of these studies. But one of the most important points to make at the outset is that organizations and individuals aren’t born with the capability to organize and manage this process: they learn and develop it over time, and mainly through a process of trial and error. They hang on to what works and develop their capabilities in that – and they try to drop those things which don’t work. For example, successful innovation correlates strongly with how a firm selects and man- ages projects, how it coordinates the inputs of different functions, how it links up with its customers, etc. Successful innovators acquire and accumulate technical resources and mana- gerial capabilities over time; there are plenty of opportunities for learning – through doing, using, working with other firms, asking the customers, etc. – but they all depend upon the readiness of the organization to see innovation less as a lottery than as a process which can be continuously improved. Another critical point to emerge from research is that Tool to help you assess areas where an organization may need to improve innovation needs managing in an integrated way; it is not its innovation management capability, enough just to be good at one thing. It’s less like running the Innovation Fitness Test, is a 100-metre sprint than developing the range of skills to available on the Innovation Portal at compete effectively in a range of events in the pentathlon. www.innovation-portal.info What, Why and When: The Challenge of Innovation Strategy Building a capability to organize and manage innovation is a great achievement, but unless that capability is pointed in a suitable direction the organization risks being all dressed up with nowhere to go! And for entrepreneurs starting a new venture the challenge is even greater: without a clear sense of direction, a vision you can share with others to excite and focus them, the whole thing may never take off. So the last theme we need to consider is where and Activity to explore this theme, how innovation can be used to strategic advantage. strategic advantage through innovation, is available on the Table 1.6 gives some examples of the different ways Innovation Portal at in which this can be achieved, and you may like to add www.innovation-portal.info your own ideas to the list. www.innovation-portal.info 28 Part I Entrepreneurial Goals and Context TABLE 1.6 Strategic advantages through innovation Mechanism Strategic advantage Examples Novelty in product Offering something no one else Introducing the first (Walkman, or service offering can fountain pen, camera, dishwasher, telephone bank, online retailer, etc.) to the world Novelty in process Offering it in ways others cannot Pilkington’s float glass process, match – faster, cheaper, more Bessemer’s steel process, Internet customized, etc. banking, online bookselling, etc. Complexity Offering something others find Rolls-Royce and aircraft engines difficult to master (only a handful of competitors can master the complex machining and metallurgy involved) Legal protection Offering something others cannot Blockbuster drugs like Zantac, of intellectual do unless they pay a licence or Prozac, Viagra, etc. property other fee Add/extend range Move basis of competition (e.g. Japanese car manufacturing, of competitive from price of product to price and which systematically moved the factors quality, or price, quality, choice) competitive agenda from price to quality, to flexibility and choice, to shorter times between launch of new models, and so on – each time not trading these off against each other but offering them all Timing First-mover advantage (being first Amazon.com, Yahoo – others can can be worth significant market follow, but the advantage sticks to share in new product fields) the early movers Fast-follower advantage (some- Personal digital assistants (iPads) times being first means you and smartphones have captured a encounter many unexpected huge and growing share of the mar- teething problems, and it makes ket. In fact, the concept and design better sense to watch someone were articulated in Apple’s ill-fated else make the early mistakes Newton product some five years and move fast into a follow-up before Palm launched its success- product) ful Pilot range – but problems with software and especially handwrit- ing recognition meant it flopped. By contrast, Apple’s success with iPod as an MP3 player came because it was quite late into the market and could learn and include key features into its dominant design www.innovation-portal.info  Chapter 1 The Innovation Imperative 29 TABLE 1.6 (Continued) Mechanism Strategic advantage Examples Robust/platform Offering something which pro- Sony’s original Walkman architec- design vides the platform on which other ture which has spawned several variations and generations can generations of personal audio be built equipment (minidisk, CD, DVD, MP3, iPod) Boeing 737 (over 30 years old, the design is still being adapted and configured to suit different users) remains one of the most success- ful aircraft in the world in terms of sales Intel and AMD with different variants of their microprocessor families Rewriting the Offering something which repre- Typewriters vs. computer word rules sents a completely new product processing, ice vs. refrigerators, or process concept – a different electric vs. gas or oil lamps way of doing things – and makes the old ones redundant Reconfiguring Rethinking the way in which bits Zara and Benetton in clothing, Dell the parts of the of the system work together (e.g. in computers, Toyota in its supply process building more effective networks, chain management outsourcing and coordination of a virtual company) Transferring Recombining established ele- Polycarbonate wheels transferred across differ- ments for different markets from application market like rolling ent application luggage into children’s toys – contexts lightweight micro-scooters Others Innovation is all about finding new Napster began by writing software ways to do things and to obtain which would enable music fans strategic advantage – so there will to swap their favourite pieces via be room for new ways of gaining the Internet – the Napster program and retaining advantage essentially connected person-to- person by providing a fast link. Its potential to change the architec- ture and mode of operation of the Internet was much greater, and although Napster suffered from legal issues followers developed a huge industry based on download- ing and file sharing www.innovation-portal.info 30 Part I Entrepreneurial Goals and Context The problem isn’t the shortage of ways of gaining competitive advantage through innova- tion but rather which ones to choose and why. It’s a decision all organizations have to take, be it a start-up deciding the (relatively) simple question of go/no go in terms of trying to enter a hostile marketplace with its new idea or a giant firm trying to open up new market space through innovation. And it’s not just about commercial competition. The same idea of stra- tegic advantage plays out in public services and social innovation. For example, police forces need to think strategically about how to deploy scarce resources to contain crime and main- tain law and order, while hospital managements are concerned to balance limited resources against the increasing demands of healthcare expectations. Creating an Innovation Strategy Putting an innovation strategy together involves three key steps, pulling together ideas around core themes and inviting discussion and argument to sharpen and shape them. These are: Strategic analysis: what could we do? Strategic selection: what are we going to do, and why? Strategic implementation: how are we going to make it happen? Let’s look at each of these in more detail. Strategic Analysis Strategic analysis begins with exploration of innovation space: where could we innovate and why would it be worth doing so? A useful place to start is to build some sense of the overall environment, to explore the current threats and opportunities and the likely changes to these in the future. Typically, questions here relate to technologies, to markets, to underlying politi- cal trends, to emerging customer needs, to competitors and to social and economic forces. It’s also useful to add to this map some sense of who the players are in the environment: the particular customers and markets, the key suppliers and the number and type of competitors. Within this framework it’s also important to reflect on what resources the organization can bring to bear. What are its relative strengths and weaknesses and how may it build and sustain a competitive advantage? Tools to help with this mapping (It’s important to remember that these are tools to exercise, such as PEST analysis, help start a discussion – not accurate measuring devices. Rich pictures, SWOT and Five There are real limitations to how much we can know forces strategic analysis, are about an environment which is complex, interactive and available on the Innovation Portal at constantly changing, and there are often wide differences www.innovation-portal.info about where the strengths and weaknesses actually lie.) Having explored this environment, we need to understand the range of possibilities. Where can we innovate to advantage? What kinds of opportunities Activity to map the innovation environment using these tools is exist for use to create something different and capture available on the Innovation Portal at value from bringing those ideas into the world? www.innovation-portal.info We can think about strategy as a process of explor- ing the space defined by our four innovation types – the www.innovation-portal.info  Chapter 1 The Innovation Imperative 31 PARADIGM (MENTAL MODEL) (incremental... radical) PRODUCT PROCESS INNOVATION (SERVICE) (incremental... radical) (incremental... radical) (incremental... radical) POSITION FIGURE 1.4 Exploring innovation space 4Ps mentioned earlier. Each of our 4Ps of innovation can take place along an axis running from incremental through to radical change; the area indicated by the circle in Figure 1.4 is the potential innovation space within which an organization can operate. Where it actually explores and why – and which areas it leaves alone – are all questions for innovation strategy. And for new-entrant entrepreneurs this can provide a map of explored and unexplored territory, showing where there is open opportunity, where and how to tackle exist- ing players, etc. It also provides a useful map for social innovation: where could we create new social value, where is there unexplored territory, where and how could we do things differently? Table 1.7 gives some examples of innovations mapped onto this 4Ps model. Strategic Selection The issue here is choosing out of all the things we could do which ones we will do – and why? We have scarce resources so we need to place our bets carefully, balancing the risks and rewards across a portfolio of projects. There are plenty of tools to help us do this, from simple financial measures like payback time or return on investment through to complex frameworks which compare projects across many dimensions. We look more closely at this toolkit and the different ways we can make decisions under uncertainty in Chapter 8. www.innovation-portal.info 32 Part I Entrepreneurial Goals and Context TABLE 1.7 Some examples of innovations mapped onto the 4Ps model Incremental: do what Innovation type we do but better Radical: do something different ‘Product’: what Windows 7 and 8 replacing Vista New to the world software (e.g. the we offer the world and XP, essentially improving first speech-recognition program) existing software New versions of established car Toyota Prius’s hybrid engines models (e.g. the VW Golf essen- (bringing a new concept) and the tially improving on established car Tesla high-performance electric car design) Improved performance incandes- LED-based lighting (using com- cent light bulbs pletely different and more energy efficient principles) CDs replacing vinyl records Spotify and other music-streaming (essentially improving on storage services (changing the pattern technology) from owning to renting a vast library of music) Process: how we Improved fixed-line telephone Skype and other VOIP systems create and deliver services that offering Extended range of stock-broker- Online share trading ing services Improved auction house eBay operations Improved factory operations Toyota Production System and efficiency through upgraded other ‘lean’ approaches equipment Improved range of banking ser- Online banking and now mobile vices delivered at branch banks banking in Kenya and the Philippines (using phones as an alternative to banking systems) Improved retailing logistics Online shopping Position: where Häagen Dazs changing the target Addressing underserved mar- we target that market for ice cream from chil- kets – for example the Tata Nano offering and the dren to consenting adults aimed at emerging but relatively story we tell poor Indian market with car priced about it around $2000 Airlines segmenting service Low-cost airlines opening up air offering for different passenger travel to those previously unable groups – Virgin Upper Class, BA to afford it (create new market and Premium Economy, etc. disrupt existing one) www.innovation-portal.info  Chapter 1 The Innovation Imperative 33 TABLE 1.7 (Continued) Incremental: do what Innovation type we do but better Radical: do something different Dell and others segmenting Variations on the ‘One laptop per and customizing computer child’ project (e.g. Indian govern- configuration for individual users ment $20 computer for schools) Online support for traditional University of Phoenix and others higher education courses building large education busi- nesses via online approaches to reach different markets Banking services targeted at key ‘Bottom of the pyramid’ segments (e.g. students, retired approaches using a similar people) principle but tapping into huge and very different high-volume/ low-margin markets (e.g. Aravind Eye Clinics, Cemex construction products) Paradigm: how Bausch & Lomb moved from ‘eye Grameen Bank and other micro- we frame what wear’ to ‘eye care’ as its busi- finance models (rethinking the we do ness model, effectively letting go assumptions about credit and the of the old business of specta- poor) cles, sunglasses (Raybans