How Lack of Innovation Leads to Business Model Failure in Entrepreneurship - Literature review Example

• Introduction

Entrepreneurship can be defined as the willingness and capacity to organize, develop and manage a business concern in order to fulfill profit-making objective in the long-run. One of the common examples of entrepreneurship is starting up a new firm. Entrepreneurs cannot afford to negate various risks associated with entrepreneurship, especially in the initial stage. Many economists and market researchers proclaim that entrepreneurship spirit is the blending of risk-taking appetite and innovation. An entrepreneur is identified as a business leader who innovate new business processes and generate new ideas. An entrepreneur primarily operates in a stipulated entrepreneurship ecosystem that is already established. Entrepreneurship comprises of various governmental programs that support start-ups and entrepreneurs. Some of the well-known entrepreneurship hubs are New York City, Silicon Valley, Singapore and Boston. Other entrepreneurship ecosystems are situated in those places where top research universities, high-tech firms and venture capitalist are clustered together. Even though plethoras of opportunities exist nowadays for entrepreneurship but it is not easy to start a profitable enterprise. Management problems, financial issues and marketing failures are some of the frequently arising issues that start-ups face. If the business model of a start-up firm is not well fortified then it cannot resolve the abruptly arising issues.

• Research Question

The research questions of this study are as follows.

1) How lack of innovation leads to business model failure in entrepreneurship?

2) What are the common challenges in entrepreneurship and how it can be mitigated by entrepreneurs?

3) To what extent ‘green’ practices and “social entrepreneurship” can result into successful entrepreneurship?

• Literature Review

According to Trimi & Berbegal-Mirabent (2012), three main problems associated with entrepreneurship are weak management, insufficient capital and ineffective marketing. Many start-up firms are plagued by problem of insufficient capital (Trimi & Berbegal-Mirabent, 2012). In fact, various firms have to wrap up in no time because of inadequate economic resources. Apart from the above mentioned issues, inappropriate cash flow management is also a major concern for start-up firms. Entrepreneurs of start-up firms have to wait for longer period of time to receive payments. Initially entrepreneurs perform a task and then they send invoice which is paid at least after 30 days. However, in the meantime entrepreneurs have to pay various parties. An entrepreneur may possess both creativity and skill to manage a firm but that is not adequate for effective management. For instance, a product that an entrepreneur wants to roll out in the market may not be desirable for the customers. Moreover, a weak management team is expected from a weak manager. Weak management of an enterprise is reflected in the form of poor operational performance and inadequate business plan. Most of the start-up firms want to broadcast their products in a more attractive way compared to that of their competitors. As a result, lots of funds are consumed in marketing by them. In certain instances, inadequate market research leads to poor selection of timing for new product introduction. Many entrepreneurs commit mistake of acquiring new customers at a high cost. A start-up firm is unable to extract profit from the business if its customer acquisition cost is more than that of revenue.

Santos (2012) stated that hiring right employees for entrepreneurship is important because without them it is difficult to manage various operations within the firm. Practically, an entrepreneur alone cannot run entire entrepreneurship (Santos, 2012). Compensation that is paid by entrepreneurs in the initial stage of start-ups is always relatively lower than that of the existing firms of the market. Resultantly, it may take many days to hire the right candidates within the firm’s budget. There are some instances where the firm has to change its strategy to increase the compensation amount in order to hire best of the employees.

Ucbasaran, Shepherd, Lockett, & Lyon (2013) proclaimed that entrepreneurship is incomplete without implementation of appropriate business model. Every entrepreneur either implicitly or explicitly intends to employ right business model for their firm (Ucbasaran, Shepherd, Lockett, & Lyon, 2013). A business model typically characterizes a firm’s architecture or design of value creation and its mechanism of delivery. To be more precise, business model of a firm explicitly explains how it entices the customers to purchase and transform these into profit. Business model may remain embedded in a firm’s cash flow statement and income statement. It is an integral feature for market economies where heterogeneity, transaction costs and customer choice prevail amongst producers, customers and market competition itself. Entrepreneurship cannot become successful without constant invention by the entrepreneurs. Sometimes technological innovation is part and parcel of a firm’s business model. Ideal business models are highly situation-based. Adjusting, selecting and improving business models are considered to be complex art for an entrepreneur. It is demonstrated in history that business models are supposed to represent innovation and facilitate. Entrepreneurs are considered to be innovators of a nation’s economy. Entrepreneurship helps the economy to afloat and produces financial gains in due course of time.

Maclean, Harvey, & Gordon (2013) expounded that business models fail because of several reasons; they are namely flawed framework, poor execution, external threats and addressing irrelevant job of a customer. There are two types of business models; they are namely, platform model and pipes model (Maclean, Harvey, & Gordon, 2013). Entrepreneurs can make mistake of monitoring their start-ups in a wrong way. For instance, a firm is trying to establish a platform but implementing pipe strategies can be regarded as a grave mistake. Pipes have always been dominant business models. In this model, consumption is done downstream whereas the value that is produced moves upstream. Firms produce commodities, use various marketing strategies and sell to their target group. Precisely, a linear flow exists in the entire system which is similar to the flowing of water in pipelines. Platform business models which are very different from pipes allow a firm’s customers to consume and create value. Difference between both the models can be demonstrated via an example; YouTube may work based on platform strategy while TV Channels opt for Pipe business model. Entrepreneurship fails because entrepreneurs tend to stick with a familiar strategy and become myopic. Furthermore, if an entrepreneur tries to build a platform model by following the footsteps of pipe model then a firm is destined to fail in the market.

According to Lumpkin, Moss, Gras, Kato, & Amezcua (2013) entrepreneurs who are focused on social entrepreneurship can become agents of change in the long-run. Majority of the entrepreneurship are based on opportunities. They relentlessly seek opportunities to add value in their target audiences’ lives. Entrepreneurs can become more successful if they understand that environment and natural resources are at stake because of urbanization and industrialization (Lumpkin, Moss, Gras, Kato, & Amezcua, 2013). Only few entrepreneurs are genuinely attached to Mother Nature. There are several multinational and domestic firms which falsely demonstrate their sustainable ideologies to various stakeholders to establish their reputation. However, only a handful of them truly pursue these ideologies. Entrepreneurship has the opportunity to become successful if it embraces ‘green’ practices.

• Findings

Entrepreneurs who are adapting ‘green’ practices in entrepreneurship can play significant role in establishment of more sustainable commercial and economic system. Today’s entrepreneurs are facing major challenges pertaining to social and environmental issues. Vast human population is instrumental in creating detrimental effects on the environment as well as social sphere. It is both duty and responsibility of the entrepreneurship to contribute in safeguarding economy, environment and social conditions. Entrepreneurs can make judicious choices and opt for ‘green’ business practices. There are many firms which opt for corporate social responsibilities to succeed amongst their competitors. Sustainable entrepreneurship can fulfill the profit-making objective as well as address various concerns of the society. The enterprises which are focused on value creation by simultaneously addressing social and environmental concerns can contribute in ecosystem restoration. Start-up firms have to establish their brand names in the market via one or the other way. Sustainable entrepreneurship can be one of the best ways to promote a start-up firm’s brand name and brand reputation (Perry, Chandler, & Markova, 2012). Entrepreneurs opt for “creative destruction” process via their out-of-box thinking. They mostly revolutionize or reform various patterns of production to establish their identity. Highest level of entrepreneurship can be witnessed in America because youths of United States have good risk-taking appetite and spirit of innovation. It is needless to mention though that plethora of venture opportunities exist within the boundaries of America. An example of more sustainability-oriented product that has been rolled out by an entrepreneur is Nest Learning Thermostat. Even in earlier eras, programmable and normal thermostats existed but none of them were much energy efficient. Nest Labs is a start-up of Silicon Valley which created the innovative and “sustainability-oriented” product “Nest Thermostat”. The product is designed in such as way that it can sense the presence of humans. Thermostat automatically stops cooling or heating if presence of any household member cannot be detected where it is placed (Lumpkin, Moss, Gras, Kato, & Amezcua, 2013). Successful companies of the global market should act as benchmark for the firms which are about to start their journey. Right from policies, practices, corporate governance, leadership and management of multinational corporations are like yardsticks for start-up firms.

Main components of business models are key activities, key partners, value proposition, channels, key resources, cost structure, revenue streams, customers segments and customer relationship. Business model of an enterprise is considered to be the framework which should be followed by various stakeholders and the firm itself. Start-up companies thrive on opportunities and that is why they have to identify as soon as it arrives. Apart from opportunities, innovation also plays a crucial role in entrepreneurial success. Start-up firms have to remain proactive to various market activities instead of reactive. Enterprises which are already established in the market have strong customer base unlike the start-up firms. For instance, Apple Inc. has embraced reactive strategy in order to have edge over its competitors (Shepherd, Williams, & Patzelt, 2015). However, reactive strategy does not decrease the profit margin of the company because of its established brand name and loyal customer base. Some of the successful entrepreneurs of the world are Mark Zuckerberg, Bill Gates, Steve Jobs, Richard Branson, Larry Page, and Jeff Bezos. Innovation has played an integral part in the above mentioned entrepreneurs’ success. For instance, Steve Jobs has been instrumental in revolution of personal computer and other key products including iPhone, iPod and McIntosh. Jeff Bezos is one of the renowned entrepreneurs of this era as he revolutionized e-commerce and leveraged it to newer heights. Catering to customer demand, innovation and flexibility are three promising way to reach the zenith of success in the long run for an enterprise. The above mentioned statement can be best understood by the help of an example. Business model which was adopted by Google in the initial stage of its entrepreneurship failed miserably and its maddening low profit margin compelled it to search for stable revenue source. The company changed its strategy and started to sell search appliances to various business concerns (Perry, Chandler, & Markova, 2012). However, mere strategy change and lack of innovation did not work much in its favor for longer period of time. As a result, the enterprise rolled out ‘Adwords’ program in order to increase its profit margin. It is noticeable that the reputation of Google changed overnight from search engine tool to advertising giant. Later it was recorded that the company earned 21 billion dollars as revenue only in its advertising portfolio. Even today, Google earns a large share of its revenue from its advertisements.

Main challenges faced by entrepreneurs in the beginning of start-ups are shortage of capital, lack of skills pertaining to management, weak business model, rigidity, lack of risk management and vague purposes. Solutions to these problems are not as difficult to find as the entrepreneurs think it to be. It is necessary for the entrepreneur to cut off expenses that are not required. Apart from this, entrepreneurs have to build good rapport with various business associates, financial institutes and other entities which can be instrumental in the growth of the enterprise. Hiring an expert or consultant for taking various advises pertaining to recruitment, finances, etc., always prove beneficial for entrepreneurship. There are several occasions when the enterprise is not clear about its objectives and goals (Santos, 2012). Resultantly, a start-up firm should always set its mission and vision right from the beginnings; it should also be shared with various stakeholders.

• Conclusion

In the above paragraphs, it is discussed how entrepreneurship can become successful via innovation and appropriate implementation of updated business model. In the beginning, any start-up firms face major challenges. However, it depends on an entrepreneur whether he would treat these challenges as learning lessons and emerge stronger or get subdued by market demands. Apart from these, it is also discussed how “social entrepreneurship” and ‘green’ practices can also play substantial role in success of entrepreneurship. The enterprises which cannot become flexible and change their business model in due course of time may have to face plethora of problems and wrap up their business. Common recurring problems that are faced during entrepreneurship are capital shortage, poor management and lack of clear purposes.

• Summary

Entrepreneurship is considered to be an important growth engine of a country’s economy. It may not be fostered via venture capital funding only. Entrepreneurial development has become dire necessity for the holistic leverage of economy. Mainly the process of creating an enterprise by an entrepreneur is known as entrepreneurship. Entrepreneurs constantly seek opportunities where they can convert their “out-of-box” thinking into financial units. Entrepreneurship cannot sustain without constant innovation and high risk-taking appetite. It also demands continuous optimization of performance and resources. Some famous entrepreneurs who have established their enterprises via creativity and recognizing lucrative opportunities are Bill Gates, Larry page , Steve Jobs, Mark Zuckerberg, etc. In the above paragraphs, example of Google has been demonstrated in order to understand how change in business model can take an enterprise to heights of success. In fact, it is also exemplary in case of flexibility depiction. There are several entrepreneurship ecosystems in the world; they are namely, Silicon Valley, New York City, Boston and Singapore. High-tech enterprises, renowned research universities and venture capitalist are all clustered in the above mentioned places. Initially, entrepreneurs find it challenging to accumulate and channelize various resources, whether it is human resources or financial resources. Both enterprises and the entire community are surviving on natural resources. As a result, it is the responsibility of the entrepreneurs to safeguard nature as much as possible. Even the customers are becoming aware about depletion of natural resources. Consequently, CSR or ‘green practices’ can help an enterprise to attract large number of customers from different geographical locations.