Chapter 3: Innovation

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 What is Innovation?

Innovation is the specific tool of entrepreneurs, the

means by which they exploit change as an
opportunity for a different business or a different
service

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 Purposeful innovation

• Entrepreneurship is enormously risky

• Entrepreneurship is “risky” often because entrepreneur
are not sure about what they are doing
• Above all entrepreneurship needs to be based on
purposeful innovation

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 Seven Sources for Innovative Opportunity

• Entrepreneurs innovate. Innovation is the specific instrument

of entrepreneurship
• Whatever changes the wealth-producing potential of already
existing resources constitutes innovation

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 Sources of innovation
• The first four sources lie within the enterprise (Drucker, pg 35)
– The unexpected
– The incongruity
– Innovation based on process need
– Changes in industry or market structure

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 Sources of innovation
• The second set involves changes outside the enterprise or
industry
– Demographics
– Changes in perception
– New knowledge
• They are listed in descending order of reliability and
predictability

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 The Unexpected (pg 37)
• The unexpected success is almost totally neglected; worse,
managements tend actively to reject it (Macy Store)
• One reason why it is difficult for management to accept
unexpected success is that all of us tend to believe that
anything that has lasted a fair amount of time must be
“normal”

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 The Unexpected
• The unexpected success can be galling
• The unexpected success is a challenge to management’s
judgment
• Far more often, the unexpected success is simply not seen at
all
• The unexpected success demands innovation

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 The Unexpected
• It is not enough to depend on accidents. The search must be organized
• Managements must look at every unexpected success with the
questions:
1. What would it mean to us if we exploited it?
2. Where could it lead us?
3. What would we have to do to convert it into an opportunity?
4. How do we go about it?

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 The Unexpected Failure

• Failures, unlike successes, cannot be rejected and rarely go

unnoticed. But they are seldom seen as symptoms of
opportunity (basic house – first house)
• The unexpected failure demands that you go out, look
around, and listen. Failure should always be considered a
symptom of an innovative opportunity

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 Source: Incongruities
• An incongruity is a discrepancy, a dissonance, between what is
and what “ought” to be, or between what is and what
everybody assumes it to be
• An incongruity is a symptom of an opportunity to innovate
• They are qualitative rather than quantitative

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 Incongruous Economic Realities
• If the demand for a product or a service is growing steadily, its
economic performance should steadily improve too
• A lack of profitability and results in such an industry indicates
an incongruity between economic realities
• Something has to be done

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 Source: Process Need
• Process need starts out with the job to be done. It is task-
focused rather than situation-focused
• In innovations based on process need, everybody in the
organization always knows that the need exists

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 Process Need
• Innovations based on process needs require five basic criteria
(pg 73)
1. A self-contained process (buying shushi)
2. One “weak” or “missing” link
3. A clear definition of the objective
4. That the specifications for the solution can be defined clearly
5. Widespread realization that “there ought to be a better way”

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 Process Need
• There are, however, some important caveats:
1. The need must be understood
2. We may understand a process and still not have the knowledge to
do the job
3. The solution must fit the way people do the work and want to do it

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 Industry and Market Structures
• Industry and market structures sometimes last for many, many years
and seem completely stable (pay first then travel)
• Actually, market and industry structures are quite brittle
• A change requires entrepreneurship from every member of the industry.
It requires that each one ask anew: “What is our business?”

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 The Opportunity
• A change in industry structure offers exceptional opportunities,
highly visible and quite predictable to outsiders. But the
insiders perceive these same changes primarily as threats

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 When Industry Structure Changes

• Four near-certain, highly visible indicators of impending

change can be pinpointed:
1. The most reliable and the most easily spotted of these indicators is
rapid growth of an industry

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 When Industry Structure Changes

2. By the time an industry growing rapidly has doubled in volume,

the way it perceives and services its markets is likely to have
become inappropriate
3. There will be a convergence of technologies that hitherto were
seen as distinctly separate (e.g. telco and IT)

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 When Industry Structure Changes

4. An industry is ripe for basic structural change if the way in which it

does business is changing rapidly
• Innovations that exploit changes in industry structure are particularly
effective if the industry and its markets are dominated by one very
large manufacturer or supplier, or by a very few

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 Source: Changes in Perception
• In mathematics there is no difference between “The glass is
half full” and “The glass is half empty” (pg 99)
• If general perception changes from seeing the glass as “half
full” to seeing it as “half empty,” there are major innovative
opportunities

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 Changes in Perception
• When a change in perception takes place, the facts do not
change. Their meaning does
• Whether sociologists or economists can explain the
perceptional phenomenon is irrelevant. It is concrete: it can be
defined, tested, and above all exploited

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 Source: New Knowledge (pg 107)

• Knowledge-based innovation is the “super-star”

of entrepreneurship. It gets the publicity. It gets
the money. It is what people normally mean
when they talk of innovation

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 New Knowledge

• Knowledge-based innovation differs from all other

innovations in its basic characteristics: time span, casualty
rate, predictability, and in the challenges it poses to the
entrepreneur
• And, like most “super-stars,” knowledge-based innovation
is temperamental, capricious, and hard to manage

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 The Characteristics of Knowledge-Based Innovation

• Knowledge-based innovation has the longest lead time of all

innovation
– By 1918, all the knowledge needed to develop the computer was
available. The first computer became operational in 1946
• Only major external crises can shorten the lead time (pg 108)

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 What Knowledge-Based Innovation Requires
1. In the first place, knowledge-based innovation requires
careful analysis of all the necessary factors, whether
knowledge itself, or social, economic or perceptual factors
– The analysis must identify what factors are not yet available so that
the entrepreneur can decide whether these missing factors can be
produced

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 What Knowledge-Based Innovation Requires
– Failure to make such an analysis is an almost sure-fire prescription
for disaster
2. The second requirement of knowledge-based innovation is a clear
focus on the strategic position (your project)
– There are basically only three major focuses for knowledge-based
innovation
I. To develop a complete system that would then dominate the field

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 What Knowledge-Based Innovation Requires
II. The second clear focus is a market focus
III. The third focus is to to occupy a strategic position, concentrating on a key
function
– Within the same industry, individual knowledge-based innovators
can sometimes chose between these alternatives

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 What Knowledge-Based Innovation Requires
3. Finally, the knowledge-based innovator needs to learn and to
practice entrepreneurial management
– Entrepreneurial management is more crucial to knowledge
innovation than to any other kind – i.e. have a good business plan

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 The Unique Risks
• First, by its very nature it is turbulent
• There is a “window” of a few years during which a new venture
must establish itself in any new knowledge-based industry
• These facts have two important implications:

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 The Unique Risks

1. First, science-based and technology-based innovators alike

find time working against them
2. Because the “window” is much more crowded, any one
knowledge-based innovator has far less chance of survival
– Largely because of the emergence of a world market and global
communications, the number of entrants during the “window”
period has greatly increased

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 The Shakeout

• The “shakeout” sets in as soon as the “window” closes.

And the majority of ventures started during the
“window” period do not survive the shakeout
• That a certain industry will become important is fairly
easy to predict. The question is, Which of the specific
units in this industry will be its leaders and so survive?

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 The Shakeout
• There is only one prescription for survival during the shake-out:
entrepreneurial management
• Entrepreneurial management is probably a precondition of
survival, but not a guarantee thereof

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 The Receptivity Gamble
• To be successful, a knowledge-based innovation has to be “ripe”; there
has to be receptivity to it
• We do not necessarily perceive, even with hindsight, why a particular
knowledge-based innovation has receptivity or fails to find it
• There is no way to eliminate the element of risk, no way even to reduce
it

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 Principles of Innovation
• The Do’s
1. Purposeful, systematic innovation begins with the analysis of the
opportunities
2. Innovation is both conceptual and perceptual. The second
imperative of innovation is therefore to go out to look, to ask, to
listen

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 Principles of Innovation
3. An innovation, to be effective, has to be simple and it has to be
focused
4. Effective innovations start small
5. But, and this is the final “do”—a successful innovation aims at
leadership

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 Principles of Innovation
• The Don'ts
1. The first is simply not to try to be clever
2. Don’t diversify, don’t splinter, don’t try to do too many things at once
3. Finally, don’t try to innovate for the future. Innovate for the present!
– The first innovator who fully understood this third caveat was probably Edison
– Innovative opportunities sometimes have long lead times

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 Principles of Innovation
• There are three conditions:
1. Innovation is work
2. To succeed, innovators must build on their strengths
3. Innovation is an effect in the economy and society, a change in the
behavior of people. Or it is a change in a process

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 The Conservative Innovator
• Innovators define risks and confine them. The are successful to the
extent to which they systematically analyze the sources of innovative
opportunities, then pinpoint the opportunity and exploit it
• Successful innovators are conservative. They have to be. They are not
“risk-focused”; they are “opportunity-focused”

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