Entrepreneurial Innovation: Embracing Disruptive Strategies

1. Session 8 ENTREPRENEURIAL INNOVATION

2. Significant innovation may be caused by market disruption. • Process innovation can be as effective as developing a new product. • Leaders need vision and ability to guide the activities of the development team. • Innovation depends on maximising the number of new ideas generated. • Stage Gate model may not be an appropriate process for managing entrepreneurial innovation. • Entrepreneurs exhibit a more flexible approach to innovation management. • Participation in a business network may enhance innovation ability. Session 8

3. Disruptive Innovation • Christopher proposed ‘sustained innovation’ to describe a large company developing improvements to an existing product. • The risk of this philosophy is being vulnerable to the entrance of challenger offering a more entrepreneurial proposition or marketing process. • Process example of Dell using direct marketing of PCs, while major firms relied on a direct sales force or distribution via retailers. Session 8

4. Conventional view is that large incumbent firms fail to recognise a new threat and are slow to respond effectively. • Christensen posits that market leaders are seeking to respond to customer demands to improve performance of existing technology. • Example of IBM focusing on next generation mainframe computers to meet customer demands for more powerful processing capacity. • The permitted Ken Olson of DEC to develop and launch minicomputers offering affordable computing to smaller organisations. Session 8

5. The implication of Christensen’s theory is that entrepreneurs should focus on delivering benefits not being met by large firms. • Proposed this philosophy as being ‘disruptive innovation’, because it is based on challenging existing business conventions. • The outcome of successful disruption is to create a radically different product (e.g. mobile telephone) or a new approach to process technology used in an industry. Session 8

6. Technology Disruption • Swiss firm Logitech wanted to transfer technology from Silicon Valley to Europe. • Their first product was a word processing system for desktop publishing. • The projected was terminated due to cash flow problems. • Ricoh Corporation placed a contract for Logitech to develop a graphics design workstation. • The experience caused the firm to focus on IT technologies to avoid confrontation with existing large firms in the industry. Session 8

7. Logitech focused on interface devices to make computer usage easier and simpler. • They acquired the rights to the hybrid optical-mechanical mouse in 1982. • In 1983, they began manufacturing an improved mouse design. • Initial huge market response, but Logitech was concerned over Microsoft and other US producers focusing on selling to consumers. • Logitech decided to focus on quality and innovative design to develop products sold to original equipment manufacturers (OEMs). Session 8

8. To achieve their quality aims, unlike other firms who outsourced manufacturing, Logitech kept manufacturing in-house. • They decided to locate a new manufacturing facility near to key customers in California. • Major OEMs Apple and IBM were still buying from a Japanese supplier. • Logitech could not match lower production costs, but were offered a grant to operate out of Taiwan. • High quality and lower costs enabled Apple and IBM to be recruited as customers. Session 8

9. To gain additional market share, Logitech created a mail order business using specialist computing magazines as promotional channel. • When IBM and Apple opened new plants in Europe, Logitech opened a new plant in Ireland. • To avoid price competition, Logitech offered technically superior customised products to OEMs. • To sustain its entrepreneurial culture, Logitech focused on idea and data exchange between all operations across world. • The company recognised the need to diversify into new technology, and has moved into optical scanning and hand-held data entry technology. Session 8

10. Entrepreneurs tend to favour disruptive product innovation. • This philosophy ignores fact that disruptive process innovation is often easier to achieve and implement. • Research suggests that, in highly-stable markets where product standard well defined, entrepreneurial process innovation is more likely to be successful. • It offers the advantage that customers already understand the product and require no education about its benefits. • Recommendation is that entrepreneurs review all options available for disruption. Session 8

11. PRODUCT Increased Market Penetration Disruptive Benefit Innovation Same PROCESS Disruptive Process Innovation Disruptive Diversification Innovation New Figure 8.1 Growth pathway matrix Session 8

12. Process Disruption • In 1950s and 1960s, the US steel industry was dominated by firms operating large integrated plants exploiting economies of scale. • In the mid-1960s, the Japanese entered world markets offering lower prices due to operation of more modern plants and lower labour costs. • The US industry response was to seek government support for steel tariffs on imports. • Ken Iverson at Nucor took the entrepreneurial view of need for alternative process technology. Session 8

13. He focused on building mini-mills close to customers and using scrap steel rather than iron ore as raw material. • By 1985, Nucor’s stock market value was equal to the larger US steel makers. • Iverson recognised that, in a price sensitive, essentially commodity market, standing still is not an option. • When scrap steel prices rose and competitors started to build mini-mills, Nucor again sought an entrepreneurial solution. Session 8

14. The company moved up-market by offering higher grade steel which could command a higher price. • The goal achieved by creating a thin-strip continuous casting plant to produce flat rolled steel for domestic appliance and car industries. • To reduce reliance on volatile scrap metal prices, Nucor built an iron carbide production plant in Trinidad using iron ore from Brazil. • Even the Japanese were unable to compete with Nucor’s business model in the flat rolled industry sector. Session 8

15. Leadership Style • Small firm issue of ensuring leadership style is compatible with the effective management of innovation. • In matriarchal family firms, research tends to conclude that leaders are autocratic, issuing specific instructions to staff. • The style often associated with unwillingness to seek opinions of employees over key decisions associated with product development process. • Although this approach is criticised by some academics, there is only limited empirical evidence suggesting innovation is impaired. Session 8

16. Case-based study of UK small manufacturers to examine issue of impact of leadership style. • Research concluded that the involvement of the leader was important in 4 key areas: • Opportunity identification • Market knowledge acquisition • Defining strategy • Management of development process • The study could not reach a firm conclusion about participative or autocratic style influencing outcomes. • In cases of new-to-market propositions involving complex technology, evidence was found to suggest cross-functional teamwork is a preferable approach. Session 8

17. Team Leadership • Harper posits that the issue of preferred management style less important than the leader promoting a culture of equal resources/effort to (a) improving current operations and (b) developing new solutions. • This perspective is based on the need to adopt a long-term, proactive perspective, and not waiting for a business downturn before taking action over innovation. • Sivertz and Lydon conclude that, in high-tech industries, the entrepreneurial leader role includes: • Visioning • Ensuring appropriate organisational capability • Strong customer orientation • Building innovation capacity Session 8

18. Sustaining the Vision • Peter Reilly founded a US speciality organic chemical manufacturing firm in 1896. • A self-educated entrepreneur, he saw coal tar as offering opportunities. • He patented a still for producing coal tar that dramatically improved yield during production. • This permitted entry into the wood preservation market for railroad ties, marine pilings and telegraph poles. • Reilly then entered the market offering bituminous road paving made from coal tar in place of petroleum asphalt. Session 8

19. As early as 1918 Reilly hired a leading chemist to direct R&D. • They developed carbon anodes made from coal tar for use in aluminium smelting. • The company then moved into the production of pyridines needed in the manufacture of new sulfa drugs. • Peter Reilly died without a will, which created financial problems. • Son continued to invest in R&D, and company was seen by major firms as industry leader in pyridine technology. • Founder’s grandson, now CEO, retains R&D focus, but this is now orientated around working in partnership with key customers and willingness to focus on creating new molecules where future sector opportunities have been identified. Session 8

20. Employees Customers Intermediaries IDEA SOURCES Small Firms seeking collaborative relationships Large Firms Suppliers Small firm competitors Technology Legislation Publications Figure 8.2 Idea sources Session 8

21. Obstacles to Idea Generation • It is critical to maximise the number of ideas at start of new product development process. • Potential obstacles to idea generation include: • Lightweight team allocated to the task • Failure to involve key customers • Tendency to focus on improving existing products • Lack of adequate resources • Assigned individuals lack adequate experience • Senior managers fail to motivate staff • Employee creativity • A study of US entrepreneurs revealed the best ideas came from their own inspirational thoughts, thereby raising the question of whether formalised idea generation in SMEs offers any real benefit. Session 8

22. This perspective raises the issue of whether the primary reason for new product failures is due to excessive reliance by the entrepreneur on own abilities. • The approach ignores the opportunities of exploiting employee expertise or inputs from key customers. • Added risk that entrepreneur does not accept criticism and the idea progressed without adequate evaluation. • In theory, advent of the Internet, computer-based customers and on-line marketing should enhance idea generation process. • Petersen’s 2006 research suggests many owner/managers still prefer to rely on their own intuition. Session 8

23. Idea Relevance • Small firms in mature industries tend to adopt the philosophy that innovation is neither relevant nor productive. • Owner/managers need to alter their perspective and - more importantly - instil a culture of innovation in the workforce. • Need to provide support and resources to employees who exhibit curiosity, talent and motivation. • Entrepreneurs should also promote the idea of learning from both positive and negative events. • Negative data, such as customer complaints, may trigger a new idea based on avoiding a repetition of the complaint in the future. Session 8

24. Idea Bias • Information sources for new ideas can be biased. • For example, a supplier may suggest an idea that is designed to use their components. • An intermediary may place his own business needs ahead of a supplier in proposing new opportunities. • Customers may extrapolate their own beliefs and experiences, which may not accurately portray reality. • This means entrepreneurs need to ‘think outside of the box’ to maximise idea sources. • Utilise sources such as technology advances, futuristic magazines, trade body reports and university research. Session 8

25. Stage Gate Model • A popular linear sequential model used to manage new product development comprises the 7 stages of: • Idea generation • Idea screening • Concept development • Business plan • Prototype development • Test marketing • Launch • It was developed in the large firm sector to minimise the risk of new product failure. • Supporters of the model believe each stage should be completed before progressing to the next. • Over time, questions have been raised about the effectiveness and validity of this model in relation to whether the customer understands the new proposition. Session 8

26. DEVELOPER UNDERSTANDING OF THE NEW PROPOSITION CUSTOMER UNDERSTANDING OF THE NEW PROPOSITION Source: Modified from Miller and Palmer (2001) Figure 8.3 Customer/developer interaction matrix Session 8

27. An Alternative Approach • Researchers usually find Stage Gate model is not used in the SME sector. • They conclude that small firms could be more successful if they adopted this process model. • This has led some government support agencies to promote training programmes about use of this model. • Qualitative research suggests entrepreneurs understand the model but may perceive it as being of low relevance or inapplicable. • Entrepreneurs tend to use elements and ordering of process activities to meet specific company needs. Session 8

28. Screening Test Market  Concept Development IDEA   Prototype Development Business Plan  Key:= Conventional sequential linear model = Menu-based approach to innovation management Figure 8.4 Innovation management model Session 8

29. Process Effectiveness • Whether the Stage Gate model is used is less critical than the problem of poor project management skills. • Project failure factors include: • Lack of overall strategic thinking • Lack of purpose in process • Failure of commitment among senior management • Inadequate allocation of resources • Lack of skills to overcome technological problems • Lack of appropriate manufacturing skills • Poor inter-departmental communication • Excessively rigid hierarchical decision structure • Non-involvement of key customers in development project Session 8

30. Entrepreneurs are often criticised for apparently not using structured, formal market research. • Some researchers have challenged this view because many studies are either of limited scope or use poor methodology. • Sultan and Barzack concluded that entrepreneurs do not use classic, positivist survey approach. • Instead, their orientation is to use informal 1:1 discussions with key customers, and to draw upon expertise contained within business networks. • Some small firms have poor experience of working with market research firms. • In some cases, market research firm data has been rejected because of conflicts with entrepreneur’s personal opinion. Session 8

31. Making a Spectacle • The Italian spectacle industry’s location inside the EU means it cannot hope to compete on basis of low costs. • Ongoing success depends on positioning its product as an up-market fashion accessory commanding a premium price. • The need to identify and introduce new products every year means innovation is a key driving force in sector. • The starting point of development process is the generation of new designs. • A common problem is that a design cannot be translated into a product which can easily be manufactured. Session 8

32. Lack of collaboration between designers and manufacturing personnel creates major delays in the development process. • Another problem is that the design may inhibit spectacles’ ability to deliver effective vision for user. • Another time delay problem is poor collaboration between companies and the suppliers of any new machine tools required. • It is very apparent that problems could be resolved by: • Closer collaboration across supply chain • Exploitation of IT systems to enhance communication • Use of integrated CAD/CAM systems during design and development phase • At the time of the study in 2003, there was little evidence that entrepreneurs in the industry had any interest in overcoming the identified problems. Session 8

33. Innovation Networks • Piore and Sabel concluded that the involvement of small firms in Northern Italy in collaborative networks is a post-Fordist industrial model. • Their theories have been widely accepted, and governments have sought to promote small business network creation schemes. • More recent in-depth research raises doubts about the claims and conclusions proposed by Piore and Sabel. • For example, Northern Italian collaborative networks existed long before the advent of 20th century mass production (or Fordist) philosophy. • Also evidence that networks may be dominated by a large customer firm which is non-innovative and myopic. Session 8

34. The adverse influence of a large firm is labelled ‘over embeddedness’ and reflects an excessively inward orientation. • It is often the case that networks only become innovative following intervention of a new outsider, such as a major potential overseas customer. • Networks may also be limited by lack of access to market information, knowledge of new technology, R&D skills or access to the latest machine tools. • Hence, before implementation a strategy to promote business networking, it may be necessary to assess: • Willingness to change • Access to new knowledge and/or resources Session 8

35. Research has also identified that not all entrepreneurs wish to participate in business networks. • It also appears that the nature of network relationships will influence what can be gained from membership. • ‘Weak ties’ tend to be more informal, and use varies over time. • ‘Weak ties’ are used to access new or novel information and knowledge which often exists in a tacit form within other firms/organisations. • ‘Weak ties’ often require expansion of the networking process to gain access to new knowledge sources able to provide insights on ‘leading edge’ solutions. Session 8

36. ‘Weak ties’ are often critical in the early stages of idea search and/or the resolution of complex technological issues. • ‘Strong ties’ are associated with more frequent regular interchange between network members. • They often involve exchange of confidential information, hence trust and commitment are critical influencers. • ‘Strong ties’ are exploited in later stages of innovation as a new product moves toward later development phases and product launch. • Network structures vary by industry sector and country. • Horizontal networks occur between firms at the same level in a sector (e.g. Nordic firms manufacturing fish farming equipment). Session 8

37. Other networks are vertical involving different levels in the supply chain. • A study of the Australian Bio-tech Network found members included universities, small firms engaged in product development, large pharmaceutical firms and healthcare organisations. • Healthcare organisations were perceived as critical in providing information on new opportunities, product performance requirements and prototype testing. • Research in Australia also concluded that not all high-tech small firms participate in innovation networks. • Example of small IT firms which place greater reliance on in-house R&D and key customer relations in management of innovation. Session 8