Innovation and Entrepreneurship –Drucker
How do you define entrepreneurship?
Write answers on the board
How does it differ from traditional business?
Write answer on the Board
How do you define Innovation
Write on board
Where does innovation come from? Sources
Write on the board.
What are some examples of innovation? Why are they innovations? Take 5 min to think and write it down.
What is the difference between and innovation and an improvement? Can they both be the same?
Write on board
How does innovation and entrepreneurship relate to each other?
Entrepreneurship is the means to recognize and detect an opportunity.
Then how to apply good management practices to take advantage of the opportunity thru application of innovation.
Innovation is the source that allows the entrepreneur to take advantage of the opportunity.
Not all innovation relates to something no one has ever done before. It could be applying an existing approach(s) better than anyone else or applying a non traditional way of doing something.
The practice of Innovation
Entrepreneurs need to:
Search purposefully for the sources of innovation
The changes and their symptoms to I indicate opportunities
How to apply the principles of successful innovation
Systematic entrepreneurship
French economist J.B.Say 1800 about
Entrepreneurs shifts economic resources out of an area of lower and into an area
of higher productivity and greater yield
Drucker notes that the US and Germany have succeeded to recover quicker from past economic downturns is thru the application of management principles.
Example: McDonalds
Management is identifying the end product or service
Then redesigning the process to meet the needs of the end item
Then redesign or invent the tools to support the process to provide repeat ability and quality
Define value as understood by the customer
Define quality
Set standards
Define training
Set compensation
Example:
Foundry's use of NC machines to convert a batch process into a flow process.
The technology is not new, the process concepts are not new, the application is
new.
Is entrepreneurship and innovation restricted to to small startup businesses?
Drucker notes that entrepreneurship is the willingness to make a decision. Therefore since decisions typically involve risk an entrepreneur must be willing to take a risk. He identifies this as a behavior and therefore can be learned.
It's foundation is on theory and concept not intuition.
Behaviors are based on experience and expectations.
Schumpeter identifies entrepreneurs as "creative destructors"
Entrepreneurs believe that change is good,
They search for change, respond to it, and exploits it as an opportunity
Though this differs from traditional economic thought
Failure in entrepreneurship is due to not applying the right methodology and well known practices. Drucker
Purposeful Innovation and the Seven Sources for Innovation Opportunities
Innovation
Specific instrument of entrepreneurship
Act that endows resources with a new capacity to create wealth.
Creates a resource
Resources can only be when man finds a use.
Mold, oil
Examples
Ambulances
Helicopter
Mash. Mobile army surgical hospital
Q3: what are some examples of French innovation. (Take 10 min in a group go 3)
Explain why it is an innovation
Hot air balloon
-Though the Chinese (220AD), Peruvians(450ad) and Portuguese(1709) all experimented with hot air ballons, it was the Montgoflier brothers who had the first manned flight (untethered) in 1783.
-The first military use was in 1794 by the French during the battle of Fleurus.
France vs GB, Germany, Netherlands and Dutch
Innovation does not have to be a physical machine or technology. It could be a policy or philosophy that enhances the process.
Insurance
Installment plan
Keiretsu in japan, need to check on current validity
Innovation can be more than a new product.
Innovation can be products, process, marketing and organization
Product innovation: A good or service that is new or significantly improved
(technical, materials, software, user friendliness
Process innovation: New or significantly improved production or delivery method
Techn, equip, software
Marketing innovation: Product design, packaging, placement, promotion or pricing
Organizational innovation: Business org or practice, external relations
Can there be social innovation?
Q4: is the French form of health care an innovation? Why or why not?
Churches could not keep up with wounded from ww1
Innovation is an economic or social rather than a technical term.
Change success has always been about individual acceptance rather than the specific change.
Entrepreneurs should not stumble across innovation. True entrepreneurs use a systematic method for finding opportunities and the corresponding innovations.
Systematic innovation therefore consists in the purposeful and organized search foe changes and in the systematic analysis of the opportunities such changes might offer for economic or social innovation.
Innovation exploits change
Systematic innovation means monitoring seven sources for innovative opportunities.
The first 4 sources lie within the enterprise
1. The unexpected: the unexpected success, failure, the unexpected outside event
2. The incongruity- difference between actual reality and reality as it ought to be.
3. Innovation based on the process need
4. Changes in industry structure or market structure that catch everyone unaware.
The next set involves changes outside of the enterprise
5. Demographic changes
6. Changes in perception, mood and meaning
7.New knowledge, both scientific and non scientific
There can be overlap
Source 1: the unexpected success
A perceived failure initially but resulted in a success typically by discovering an alternate use.
Story:
In the 1950's, Decker spoke with RH Macy, CEO of Macy's department store in New York. Macy complained that appliance sales were eclipsing that of the fashion sales.
Traditionally, fashion was 70% of store sales but with the introduction of appliances accounted for 60% and fashion only 40%.
Decker wondered why Macy was concerned as overall store sales increased significantly.
Q: why do you think Macy was concerned?
Macy was measuring success using an outdated metric.
The question we must pose is how should we measure the success. The concept of unexpected success is only relevant if we are not looking at the right metric.
This begs another question what is the right metric?
Does the metric help use determine when the source of the unexpected success is a trend or a fad?
If we use net revenue as our metric can we naively lose our focus and be chasing a fad or do we blindly follow the traditional path?
The opportunities that we respond to can be in seeking perfection of the current product or finding new products.The answer will drive which method of innovation we will utilize.
Once a metric has been identified then it is necessary to communicate all sources that produce the success of that metric. Not just the traditional sources.
This analysis of metric success sources relates also to traditional and non traditionalcustomers and uses.
This also applies not only to the product but to byproducts and waste.
Go to examples on slide
THE UNEXPECTED FAILURe
An unsuccessful occurrence that tells us we are going down the wrong path?
Q: how does failure provide an opportunity?
We learn either how to do something or how not to do something from every event.
A failure is simply telling us how not to do something.
The trick is to find out what is not being done well.
It can be the product/service, the marketing, the pricing, new competition or a change in customer demand.
Edison statement on making the light bulb.
Why do we sometimes not recognize we are moving down the wrong path?
I teach a class on Decision Making under Uncertainty. In the class I ask students if they are bias?Most indicate No.
But a bias is based upon beliefs as the result of experience or information gathered from someone we respect.
This bias causes us to minimize the impact of results that do not match what we had expected, a failure.
Innovation could be defined as our systematic review of this failure relative to our bias to see if this result changes our belief.
Innovation is more than just research; it is an onsite investigation of the causes of the failure, according to Decker.
THE UNEXPECTED OUTSIDE EVENT
This outside event could be caused by a competitor, new invention that indirectly competes, change in customer perception, global/national/local event.
Examples:
Computers
Tablets and books
Russian products, due to Ukrainian issue
Oil embargo in the 70s, smaller cars
Hijacking an airline; resulted in innovation in bullet proof doors
New coke, 1985.
Can the event impact small businesses?
New stadium
New trail
Cross state bicycle ride - RAGBRAI
New law on smoking
In US, heaters and shelters for patios
Source 2: Incongruities
Definition: the difference between what is and what "ought to be"
What is and what everyone assumes it to be.
The recognition of an incongruity is the potential for an opportunity.
These differences are typically qualitative not quantitative.
Q: what is meant by this statement?
Quantitative reviews are based on metrics that are measuring the current products, processes and trends.
If the market changes then these quantitative metrics may not show it.
To see this change requires surveys, talking with customers.
There are several kinds of incongruity
1. Between the economic realities of an industry
2.Between the reality of an industry and the assumption about it
3.Between the efforts of an industry and the values and expectations of its customers
4.Internal within the rhythm or the logic of a process
Incongruous Economic Realities
Why would a rising demand not result into higher profitability.
Could be because an external macro force such as the economy is the barrier
Another could be because the industry is at a max level and any new demand requires added capacity which is a costly step function.
I.e. Marginal Cost is not linear to the increased demand
Example: if you have a bakery which can produce 300 loaves of bread a day. If you have an increase in demand you will need to buy another oven, added shelves maybe another store. All adds costs which reduces your profitability.
But if you can find a way to reduce the baking time or eliminate a step then you can use the same equipment but gain added yield.
Incongruity between Reality and the assumptions about it.
This incongruity relates to placing effort in the wrong place.
This cause by a lack of understanding of the process or supply chain.
Goldratt tells us that we should look for and take action on the bottleneck.
Example would be for us to make our facility the fastest and most efficient but not considering the global supply chain.
Example: my son worked for a company that printed mailers. His job was to reduce the time it took to complete an order for 1000 pcs. He was focusing in on reducing the time by a matter of minutes.
But it did not reduce the time from when a customer placed an order till the time to deliver. Why? Because time it took to order the paper was a matter of days.
So if it took 2 days to get the paper. And it took 3 hrs to create the mailer, the end result is the customer was still getting his order in 2-3 days.
Incongruity between perceived and actual customer values and expectations
The difference is not knowing what the product or service means to the customer.
Is it a thing or does it satisfy a more personal need.
Example: what does the stock market mean to each investor?
Some it is a place to earn wealth, some it is a place to earn money for retirement.
Each has different expectations. Short vs long term needs.
Gain vs protection of money
What causes customers to buy? Product or perception of quality or trust?
Incongruity within the rhythm or logic of a process
What causes the biggest concern in a process
Where is the anxiety which slows the process even for a moment.
Typically must have a through knowledge of the total process.
Example: I was visiting Cat in Decatur. They were doing a review of processes and found that in the paint area sometimes the process was slowed because they did not have caps to cover the parts they did not want to paint. The solution was to enter into a new arrangement where a supplier would come to the facility and review the stock and send an order without receiving a purchase order instead.
This technique has been used in various places but not at Cat. This was an innovation for CAT.
An insider.
Use of options.Farmer vs investor
Source 3: Process Need
This focuses more on the improvement of an existing process than that of an opportunity
This also focuses on the supply chain and topics found in theory of constraints.
Question: what will be the technical, labor and social challenges the EU will be facing in the next 10 years.
How will these challenges impact the EU ?
Example:
Company in Brazil Indiana finding employees to fill skilled labor needs.
Example:
After WW II companies formed around feudal families.The Mc Arthur plan eliminated these groups. This left avoid. The Japanese then form Keirtsus. These were groups which formed around a large bank and did business with members of that bank.
The social welfare system in France.
Prior to WWI social services were relegated to the cities and administered by the church and prominent citizens.
After WWI the need for services from the returning soldiers was too much for the cities, which resulted in a need to create a national social service.
A successful innovation requires 5 basic criteria
1. A self contained process
2. One weak or missing link
3. A clear definition of the objective
4.That the specifications of the solution can be defined clearly
5.Widespread realization that there ought to be a better way
Caveats
1. The need must be understood
2. we may understand a process and still not have the knowledge to do the job
3.We know what we need but not how to get it.
4. the solution must fit the way people do the work and want to do it.
Source 4: industry and market structures
If a change in the industry is significant then all must change or those who do not will lose.
Examples:
Vinyl records
CDs
Book stores in US
Cigarettes in US (moved to other markets) Mostly europe france 59; US 51
GMO labeling in some states in US (Farmers)
Can you think of others. France
OPEC embargo in 1973
The internet
The market structure could be impacted by:
Wages
Interest rates
Customer perceptions
World events
The industry structure is impacted by
Supply chain (EU and Russian provided oil) (Luxury Sheets)
Capacity
Competition
Govt regulation
The opportunity from a change in structure
The opportunity is recognizing that a structural change is imminent and finds a way to satisfy this new need.
What about the phone service called Free.
Is this an innovation?
Is it a change in the structure or us it a refinement of the existing process?
Impact of Fracking in US on Oil market?
- Russia
- Middle East
Four indicators of structural change
1. Rapid growth in the industry ,none is looking at opportunities.
2. By the time sales volume has doubled the way it perceives and services the industry is likely to have become inappropriate.
-Focus is on the main product, service and customer but not on those who are on fringes.
3. The convergence of technology
4. The way it does business is changing rapidly.
Source 5: Demographics
The first four sources are the caused primarily measured thru internal means.
The remaining three sources are external, due to changes in the social, philosophical, political and intellectual environment.
The change in demographics whether it is ethnic or age or gender changes the marketplace.
The ability to recognize these demographic changes is critical in the recognition of opportunities.
Examples:
-Working women
-Size of families
-Aging workforce
Why do decision makers overlook changes in demographics?
-Based on historical assumptions
-Do not recognize the immediate impact, lots of time.
-Indicators are insufficient
-Is the demographics segmented correctly
Source 6: Changes in Perception
This source relates to the relative nature of how people perceive a statistic or result.
- Though the stat or result is increasing it may not be considered to be increasing sufficiently.
Examples could be:
•Social Innovation- though strides have been made in reducing cancer or infant mortality or unemployment. There will always be a need or opportunity to reduce to zero.
•Though risk has not changed or slightly reduced it is not at a zero or acceptable level as defined by the current customer.
•Travel could be another, when people started climbing Mount Everest it was an adventure accomplished by only a rare few hardy people. Now they offer tour packages with multiple amenities.
- Desire to move up the socio economic
Definition: Socioeconomic status is commonly conceptualized as the social standing or class of an individual or group. It is often measured as a combination of education, income and occupation.
Examinations of socioeconomic status often reveal inequities in access to resources, plus issues related to privilege, power and control.
So as groups change in education, income and occupation so does that of the demographic
•Perception of what is adequate housing; 50 years ago a 1200 sqft house was adequate but now it needs to be 2000+.
•Isn’t this the reason for luxury goods
- Half full vs half empty
- Even though significant changes have been made the changes have not satisfied the goal, which maybe total inclusion or meeting all the criteria.
- Relates to an impacted group who looks at what is missing not what they have achieved or possess.
- A resource or customer changes their perception of themselves
- An entrepreneur that recognizes this shift in perception can exploit it for sometime usually because others refuse to can their beliefs.
- If the demographic redefines itself (goals and importance change)
- Changes in perception is the change in meaning towards a group.
- Change could be in metric
- Recognition of factors that impact a decision
- Change in roles
- Change in values.
Source 7: New Knowledge