MGMT20144 Management Business Context Master of Business Administration (MBA) School of Business and Law MGMT20144 Management Business Context Unit 7 Innovation and Entrepreneurship . Table of Contents Introduction 3 Learning objectives 3 The Nature of Innovation 4 Sustaining versus Disruptive Innovation 4 Open Innovation 6 Norms that promote Creatiity and Innovation 8 Entrepreneurship and Innovation 10 Required Reading 14 References 16 Introduction Innovation is the new lifeblood for organizations. Government policy makers in nations around the world are not only talking innovation capacity within their economies but framing initiatives to encourage and where practicable apply supports and resources to assist in developing a culture of innovation in many of their core industries. Innovation is not the only area that governments and increasingly educational institutions globally are concentrating upon to develop business capabilities, entrepreneurship is increasingly seen as a key contributor to economic growth and sustainable opportunities for workforces facing the decline of legacy type industries that are now either becoming more streamlined in their human and other resourcing or are disappearing overnight replaced by new disruptor industries. Take the example of Netflix which in providing an array of on line movies and TV shows has seen the total demise of the video rental industry in markets. Netflix and now follower companies are providing a new innovative form of access to a wider range of on line movie libraries using a technology base to deliver this for a meagre monthly rental. Gone are the businesses gone are the jobs due to technological efficiency of direct on line delivery. A total disruptive innovation delivered by an entrepreneurial firm. Many of the issues covered in this topic, in particular Innovation and Entrepreneurship have facets that will be discussed in courses such as as MRKT20052 Advanced Marketing Management and MGMT20133 Strategic Business Management. In these courses the new business models and opportunities crafted by innovation practice and entrepreneurial insight and risk will be evident in case studies and theoretical concept discussions. Learning objectives This unit has the following learning objectives: 1. To understand the key concepts supporting Innovation practice and entrepreneurship 2. Examine the nature of differing theories to support innovation as sustaining, disruptive or radical in nature and the impacts that these approaches have for businesses and business managers. 3. Consider the opportunities from study of innovation and entrepreneurship practice to frame new opportunities and capabilities for a business. 4. Apply knowledge and skills gained from this unit towards resolving business challenges and issues, with particular relevance to entrepreneurial endeavor and also innovation practice for improved or breakthrough outcomes for the firm. The Nature of Innovation In the last twenty years, innovation has become a driving force in shaping competition, and even the survival of companies. Gary Hamel has been a key figure in exploring this area. Hamel and Välikangas, (2003) have suggested that we think of innovation as taking place at three levels:  Revolution: The path of creative destruction used by outsiders, changing the fundamentals of the industry;  Renewal: Change for an industry incumbent, rethinking the existing business model; and  Resilience: Continuous reconstruction (not just improvement) working on values, processes and behaviors. Resilience is the base level of this typology, and Hamel and Välikangas, (2003) argue that you have to be Resilient to stay in business today. Renewal is a key strategy for companies, as they seek to step over their competitors by coming up with a new business approach, by changing the way in which the business operates. Of course, the dream is to be a Revolutionary, a company that actually changes the whole nature of the industry. The telecommunications industry has shown all of these levels of innovation:  Resilience by coming up with new products for customers (like ‘call waiting’ and ‘call number back’ facilities;  Renewal by changing the business model through dropping charging by calls, but rather offering a fixed price for a telephone line which includes all calls (except overseas); and  Revolution by moving to VOIP telephony. Perhaps even more revolutionary from the industry’s point of view was the development of the mobile telephone, which completely changed the industry by removing its previous core business – which was all about devices attached to wires. It is important to remember that although individuals have moved to mobile phones brick based businesses and even click businesses (on-line) still rely on land lines (phone and internet) as a port of contact to order, deal with complaints or client needs, or follow up. The 21st century business relies on both telecommunications land line and mobile. Sustaining versus Disruptive Innovation In all markets there is a rate of improvement that customers can utilize or realize. Customers in the highest or most demanding levels of any market may never be satisfied with the best that is available, and those in the lowest or least demanding levels can be over satisfied with very little. For example, there are some customers of mobile phones wanting much more from the product and service offerings. They want a hand held telecommunications computer device can achieve for a wide range of social and business interactions including app use whilst other customers simply want to phone and text. In every market, there is a distinctly different trajectory of improvement as innovating companies introduce new and improved products. This pace of technological progress almost always outstrips the ability of customers in any given level of the market to apply it. A company whose products are squarely positioned on mainstream customers’ current needs today will probably overshoot these needs in the future. This happens because companies keep striving to make better products that they can sell for higher profit margins to not-yet-satisfied customers in more demanding levels of the market. Christensen draws a distinction between sustaining and disruptive innovations. A sustaining innovation targets demanding, high-end customers with better performance than what was previously available. Some sustaining innovations are the incremental year-by-year improvements that all good companies develop and present to the market. Other sustaining innovations are breakthrough products in their operations and application. It does not matter how technologically difficult the innovation is. The established competitors almost always win the battle of sustaining technology. Because this strategy entails making a better product that they can sell for higher profit margins to their best customers, the established competitors not only have the required motivation but also the necessary resources to succeed. Disruptive innovations, in contrast, don’t attempt to bring better products to established customers in existing markets. They introduce products and services that are not as good as currently available products but they are simpler, more convenient, and less expensive products that appeal to new or less-demanding customers. Once the disruptive product gains a foothold in new or low-end markets, the improvement cycle begins. And because the pace of technological progress outstrips customer needs, the previously not-good-enough technology eventually improves enough to intersect with the needs of more demanding customers. When that happens, the disruptors are on their way to crush the incumbents ultimately. Successful disruptions are almost always launched by new entrants. A modern example of a true disruptive innovation is Netflix. Christensen argues that Netflix as a “classically” disruptive model The initial service offered by Netflix was not terribly appealing to the video store mainstream customers of incumbents, like Blockbuster (Groden, 2015). These customers wanted instant gratification when choosing movies and the video store still provided this. As its quality improved, so did its appeal to Blockbuster’s customers, who eventually peeled off in high enough numbers to force the incumbent business into bankruptcy in 2010 (Groden, 2015). As Netflix solved its on line delivery model and acquired a wider range offering the offer of full catalogue any time at home for the price of what was a video deal rental was strikingly attractive leading to the demise of the video store industry and creating a range of follower businesses applying the disruption model e.g. Stan, Presto. Open Innovation According to Chesbrough (2003) the old model of innovation, was a closed system in which firms adhered to the following philosophy: Successful innovation requires control. In other words, companies needed to generate their own ideas so that they could then develop, manufacture, market, distribute and service themselves. This approach calls for self-reliance: If you want to get something done right, you’ve got to do it yourself. In the new model of open innovation, firms are able to commercialize external (as well as internal) ideas by deploying outside (as well as in-house) pathways to the market. Specifically, companies can commercialize internal ideas through channels outside of their current businesses in order to generate value for the organization. Chesbrough (2003) notes that some vehicles for accomplishing open innovation commercialization include startup companies (which might be financed and staffed with some of the company’s own personnel) and licensing agreements. In addition, ideas can also originate outside the firm’s own labs and be brought inside for commercialization. In other words, the boundary between a firm and its surrounding environment is more porous, enabling innovation to move easily between the two. In closed innovation, a company generates, develops and commercializes its own ideas. This philosophy of self-reliance dominated the R&D operations of many leading industrial corporations for most of the 20th century. In the new model of open innovation, a company commercializes both its own ideas as well as innovations from other firms and finds ways to bring its in-house ideas to market by deploying pathways outside its current businesses. Note that the boundary between the company and its surrounding environment is porous (represented by the holes in the innovation funnel), enabling innovations to move more easily between the two. Closed Innovation Principles Open Innovation Principles The smart people in our field work for us. Not all of the smart people work for us* so we must find and tap into the knowledge and expertise of bright individuals outside our company. To profit from R&D, we must discover, develop and ship it. External R&D can create significant value; internal R&D is needed to ourselves claim some portion of that value. If we discover it ourselves, we will get it to market first. We don’t have to originate the research in order to profit from it. If we are the first to commercialize an innovation, we will win. Building a better business model is better than getting to market first. If we create the most and best ideas in the industry, we will win. If we make the best use of internal and external ideas, we will win. We should control our intellectual property (IP) so that our competitors don’t profit from our ideas. We should profit from others’ use of our IP, and we should buy others’ IP whenever it advances our own business model. Source: From Chesbrough, H.W. 2003. The era of open innovation. MIT Sloan Management Review, Vol. 44, No. 3, pp. 35-41. Norms that promote creativity and innovation According to Tushman, Smith, Wood, Westerman and O’Reilly (2006) it is because innovation inherently involves risk taking, non standard solutions, unconventional teamwork practices all of which are not easily managed by formal control systems, that organization structure (in particular ambidextrous organization design) and effective management of culture becomes critical to mobilizing creativity and innovation within the organization. Tushman, et al. (2006) in their research on firms in select industries found that while not all ambidextrous designs were successful, firms that did not employ ambidextrous designs were unable to implement streams of innovations. Two business units initiated spinouts but only after the non-incremental innovations were initiated within an ambidextrous design. These exploratory results suggest that organizational design and senior leadership behaviors are powerful levers in driving streams of innovation and that ambidextrous organizational designs permit a business unit to simultaneously explore and exploit. Dawson and Andriopoulos, (2014). Identify six key norms of innovative organization cultures:  A focus on Idea Generation.  Supporting a Continuous Learning Culture.  Risk taking.  Tolerance of Mistakes.  Supporting Change.  Conflict Handling. Many companies find innovation difficult. There are many reasons for this and one way of thinking about this is to consider the language that is used – both in the private and the government sectors. When innovation is being considered, there is a lot of discussion about the ‘risks’ that are involved, and where there are risks, managers are afraid of ‘failure’. One way to address this is to change the language: instead of talking about taking a risk, it is useful to think about the ‘value of experimentation’. Rather than being concerned about failure, it is more helpful to focus on ‘learning’. Dyer, Gregersen and Christensen, (2009) take a different perspective to creating a culture of innovation and see it predominantly coming from a skills base and that innovation can be taught. They talk about underlying cognitive skills that are supported by a backbone of actions that help cultivate new insights and support creativity and innovation. It is these actions that can be taught and help to create an innovation culture that can be deeply embedded in an organization. Dyer, et al. (2009), identify five capabilities demonstrated by the best innovators: (1) Associating: drawing connections between questions, problems, or ideas from unrelated fields; (2) Questioning: posing queries that challenge common wisdom; (3) Observing: scrutinizing the behavior of customers, suppliers, and competitors to identify new ways of doing things; (4) Experimenting: constructing interactive experiences and provoking unorthodox responses to see what insights emerge; and (5) Networking: meeting people with different ideas and perspectives. Many organizations have dealt with the challenges in another way. They set up a separate part of the organization to be the ‘innovation arm’, so that the group that does creative work is kept away from the day-to-day – and conforming – side of the business. This is largely the notion of a ‘skunk works’ made famous by Lockheed Martin's Advanced Development Programs (ADP), formerly called Lockheed Advanced Development Projects. The Lockhead Martin Skunk Works was a totally separate unit at a different location to the general Lockhead Martin offices and plant. As an isolated unit set up in about 1943 its engineers developed their own work culture, systems and processes. The unit was responsible for a number of famous aircraft designs, including the U-2, the Lockheed SR-71 Blackbird, the Lockheed F-117 Nighthawk, and the Lockheed Martin F-22 Raptor. The name "Skunk Works" was taken from the moonshine factory in the comic strip Li'l Abner. This approach is further developed in an article by Gary Hamel (1999), who suggested that the task of organizations was to ‘bring Silicon Valley inside’: in other words, to replicate inside the organization the more venture capitalist approach of Silicon Valley. This requires opportunity assessment, resource investment and appetite for risk trial and fulfilling commercialization to accrue rewards. Entrepreneurship and Innovation Like innovation, entrepreneurship is not easily defined and there exists considerable debate about what it is and what it looks like. Entrepreneurs tend to be defined not by who they are, but more by what they achieve. Perhaps a reasonable definition of an entrepreneur is provided by Burns (2008): “Entrepreneurs use innovation to exploit or create change and opportunity for the purpose of making profit.” What it is that makes entrepreneurs and why they differ from ‘normal’ leaders – or do they? Are there qualities that distinguish the entrepreneurial leader and are there underlying personality traits that underpin the behaviors of entrepreneurs? The short article by Richard Branson, written after death of Apple founder Steve Jobs, provides insight into these questions. Entrepreneurship is first and foremost a mindset to identify an opportunity and to pursue it in order to produce new value or economic success. To this end the research of McGrath and McMillan (2000) is highly relevant. McGrath and McMillan (2000) argue that successful executives will learn to master uncertainty through the skills of entrepreneurial leadership. This calls for different disciplines than in conventional management. There are five key elements: 1. Creating a climate supporting continuous search for opportunity The task is to continuously identify high-potential business opportunities and exploit these opportunities with speed and confidence. Entrepreneurial leaders are distinguished from other managers by their personal practices. These fall into three categories: setting the work climate, orchestrating opportunity-seeking and moving particular ventures forward personally. 2. Framing - The process for establishing a frame involves working through the following questions: a. If you were to do something in the next three to five years that you, your boss, and your company's investors would regard as a major win, what would this look like? b. What are the minimum amount of profits you need from your new ventures (at maturity) to make a difference to your business? From your established business? What rate of growth must you sustain? c. What is the increase in profitability you need to achieve in the next three to five years? d. What return on investment are you seeking? 3. Stocking an opportunity register - An opportunity register is an inventory of potentially attractive new business opportunities. The idea is that at any point in time, you'll have a rich set of potential opportunities to choose from, rather than having only the choice of those that managed to survive a corporate winnowing process. 4. Focus - The idea is to limit your downside exposure until the upside potential of the opportunity is demonstrated. In conjunction with limiting risk, an options approach allows you to create focus and strategic alignment across your portfolio of initiatives. 5. Promoting adaptive execution - Discovery driven planning is a plan to learn, not to show that you had all the answers when you wrote the plan. The technique requires the interaction of five processes, working together. These processes are: a) determining the frame (objectives) at the level of a project; b) establishing competitive and market benchmarks; c) defining operating specifications; d) documenting assumptions; and e) establishing key milestones. Garvin (2004) discusses some basic elements and ‘home truths’ in the creation of new businesses. He identifies ten things every CEO or corporate venturer should know. A few of these include issues such as, firms have little choice but to start new businesses as their old businesses and business models decline over time and that most new businesses actually fail. Other insights include; corporate culture is a deterrent to new business creation, new businesses need time to be nurtured and assistance fitting in with the established corporation’s systems and structure. Most importantly, Garvin argues that the best predictors for success of the new business are sound market knowledge and customer demand driven products and services. The idea of the link between creativity, innovation and entrepreneurship is explored in more detail and questions are raised about what it is that supports these elements and helps provide the ‘glue’ that holds them together. In the article by Hamel (1999), the concepts of corporate entrepreneurship and corporate venturing are looked at, where large corporations themselves look for new ventures and try to crate a sense of entrepreneurialism within their own organizations. He takes this subject and offers insight into the learning that can be taken from the history of, largely unsuccessful, forays into corporate entrepreneurship. Perhaps the most noted entrepreneur of the past 35 years has been Steve Jobs. An entrepreneur that started in the infancy of the personal computer era establishing a unique and differentiated offering of products and services to continue that process until his death in 2011. No other modern entrepreneur has had such an impact on his industry in terms of the scope of innovations and the nature of them in changing social habits. The ipad, and iphone in particular changed the nature of computer, infotainment and social connectivity. The ipod as a product and itunes store finally broke the nexus of the physical Compact Disc and absolute control of the music industry by the major labels in controlling the total value chain from artists to play medium. His rise through Apple, fall from Apple, refocus through his investment in Pixar and finally triumphant return to Apple to co-create its most emblematic products and services has created a mythical status. Steve Jobs therefore remains an iconic entrepreneur spanning the 20th and 21st centuries. The following activity considers the nature of Disruptive Innovation and identifying the types of Disruptive Innovations that have contributed to society and changed the nature of industries and society as a whole. Required Reading References: Branson, R. 2011. Virgin's Richard Branson: Apple boss Steve Jobs was the entrepreneur I most admired, Telegraph, 6 October. Burns, P, 2008. Corporate Entrepreneurship: Building the Entrepreneurial Organisation, 2nd Edition, New York: Palgrave Macmillan. Chesbrough, H.W. 2003. The era of open innovation. MIT Sloan Management Review, Vol. 44, No. 3, pp. 35-41. Christensen, C.M., Raynor, M.E. & McDonald, R. 2015. What is Disruptive Innovation. hbr.org website at https://hbr.org/2015/12/what-is-disruptive-innovation accessed 8 August 2016. Dawson, P. & Andriopoulos, C. 2014. Managing Change and Innovation, Sage Publishing, London, U.K. Dyer, J.H., Gregersen, H.B. & Christensen, C.M. 2009. The Innovator’s DNA. Harvard Business Review, December, pp. 60-67. Garvin, D A 2004, What every CEO should know about creating new businesses, Harvard Business Review, July-August, pp. 18-21. Groden, C. 2015, Why Uber isn't Disruptive but Netflix Is, Fortune website at http://fortune.com/2015/11/17/uber-disruption-christensen/ accessed 8 August 2016. Hamel G. & Välikangas, L. 2003. The Quest for Resilience. hbr.org website at https://hbr.org/2003/09/the-quest-for-resilience accessed 8 August 2016. Hamel, G. 1999, Bringing Silicon Valley inside, Harvard Business Review, September-October, pp. 70-84. McGrath, R & McMillan, I.C. 2000. The Entrepreneurial Mindset. Summary, Columbia University, New York, NY. Tushman, M. Smith, W. Wood, R. Westerman, G. & O’Reilly, C. 2006. Organizational Designs and Innovation Streams. Harvard Business School Working Paper 07-087. Harvard Business School, Boston, MA.