Managing Innovation and Entrepreneurship - Essay Example

Question Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or adifferent service.” The chosen innovation is that of 3M and of its history of developing a culture of innovation. While each of the new products developed by 3M may be called an ‘innovation,’ the very outlook and approach which has evolved and been institutionalized in 3M are themselves an innovation. The approach is called the lead user process, a method stumbled upon by the product development team of the company for Medical Surgical Markets Division. By the end of their initial application of the lead user approach, an exercise which lasted only slightly over a year, the team had been able to propose three major new products; they also proposed a new strategy for addressing and treating infection through a revolutionary approach. The key factors that account for the success of this innovative approach to innovation deserve closer scrutiny. (a) Key factors that explain the success of the chosen innovation Lead users are consulted on both their needs and solutions. A key factor in 3M’s innovative approach is the extraordinary emphasis it gives to information which is collected from its products’ users. The conventional method involves research teams analyzing sales data, field reports, and complaints or requests from customers; thereafter, in-house developers brainstorm for the solution. At 3M, the lead user process involves the gathering of information through an approach that differs essentially from the traditional, because it seeks data not only on the needs but also on the solutions to these needs. It does not acquire its data from the center of the target market, but elicits responses mainly ‘from the leading edges of [the] company’s target market and from markets that face similar problems in a more extreme form’ (Hippel, Thomke, and Sonnack, 1999, p. 47). Lead users refer to the experts on the ‘leading edge of the target market’ (p.49) – that is, those who take a serious interest in the use of the particular product, are more experienced, and would tend to make it their business to examine and form a thorough and grounded perspective on the product, its technology, and the objective which that product is intended to achieve. Networking among product development partners The success of a lead user approach presents a crucial challenge – how to effectively identify the lead users from the mass of users. So much of this approach hinges on the viewpoints and suggestions of a concentrated few of the broad spectrum of users, not only on their needs but also on likely solutions. Therefore, if the research team recommends solutions which are pursued by the design team that have emanated from the wrong set of users (i.e., non-lead users), then the recommendations may not be truly reliable and the resulting product design would fall short of the expectations of the true experts and lead users. The following diagram describes the networking process 3M uses in identifying lead users. Institutionalizing the innovation process It is generally taken that the creative process is not susceptible of systematization. 3M showed that it is possible to structure the organization to systematically yield a high rate of successful new products consistently and continuously. In the diagram of the 3M networking process, the project teams work their way up ‘pyramids of expertise’ to identify the experts and lead users at the top, and to do this for related key fields. What is remarkable is that the organization is systematically structured around the technique to maximize the effectiveness of the product development process. (b) The five most important entrepreneurial lessons arising from the above analysis that could be applied to other new ventures or opportunities. Lesson 1: Develop market affinity and an understanding of the major trends For innovation to be successful it must be directed at the right objectives from the outset, which should be customer-related (Ulwick, 2002). Many entrepreneurs underestimate the value of user insight and have little knowledge about the users’ needs particularly in specialized applications such that for medical equipment. 3M’s resort to expert users had greatly improved the quality of its information from that which it would have obtained from the demographic majority of perfunctory users. Lesson 2: Think outside the box. Lead users generate innovative ideas to meet needs, not to outdo the competition. Companies commit the mistake of focusing on what other companies do, which may not really be addressing the need. Furthermore, competitors’ mindset may create false parameters within which a company defines its own designs, whereas the real solution may lie ‘outside the box’. Consulting with experts creates insights, redefines parameters, and effectively provides incentive for product designers to ‘think outside the box.’ Lesson 3: Systematize innovation 3M has been able to institutionalize its innovation process, proving that it is possible to organize and systematize the creation of new products. It is a myth that creativity is random and unpredictable; however, if such were the case, then companies known for their innovativeness would have been statistically impossible. Entrepreneurs should explore persistent and recurring elements in their new product development to build these elements into their organizational systems, and should explore all the opportunities in the market (Verganti, 2011). Lesson 4: Promote innovation as corporate culture Systematizing innovation lays the ground support, but the initiative still rests on the people who make the business work. When the workplace is conducive to work, building in a sense of creativity into the corporate culture provides the spark. Corporate culture must be tolerant of experimentation, flexible to accommodate individual initiative, and quick to recognize and reward creativity and discovery. The Business Masters reading on Innovation Breakthrough has established a number of programs and awards (pp. 56-57), namely the golden Step Award, the Technical Circle of Excellence, Carlton Society, Genesis Grants and Alpha Grants. Small enterprises do not need to establish grand awards and societies, but should recognize before the management and peers, those individuals whose initiatives have contributed much to the organization. Lesson 5: Insight can come from anyone and anywhere. Innovative ideas can come from the most unlikely places in the organization. The Business Masters reading states that 3M owes its survival to William L. McKnight, ‘a young farm boy from South Dakota’ who was employed as the firm’s ‘$10.50-a-week’ bookkeeper. McKnight, years later as 3M’s sales manager, came up with the idea of surveying customers’ problems that eventually led to two of its most successful products. Entrepreneurs must welcome and assess new ideas from wherever in the organization it may be generated. Question 2: “Barriers to imitation are never needed if you are a good entrepreneur [and] have the ability to appropriate value from an innovation.” I disagree with the statement in the main, although it is possible that in some industries and selected segments or niches the statement may ring true. There are instances where barriers to imitation are not only needed but are essential in protecting the innovator’s interests in the innovation breakthrough; a knowledge of barriers to imitation is likewise crucial to protect a likely ‘emulator’ from threat of lawsuit for damages. That being said, not all innovation is first-to-market or innovation from scratch. There are innovations that appropriate value from an already existing discovery or invention. One way is through adaptation or ‘taking one’s own or a competitive product and improving it in some way’ (Crawford & Di Benedetto, 2003, p. 58). Examples of these are the CD drive for PCs and the 17-inch PC screen. The other way is through imitation or emulation which outrightly, though not always legally, appropriates the value in a new product, by copying the product. The appropriation is legal if a license is acquired from the originating company; conversely, it is illegal if patent infringement is involved. Examples include Jell-O Pudding imitating My-T-Fine, Country Time lemonade mix imitating Wyler’s, and Stayfree imitating Kotex. Different types of barriers entrepreneurs have used to protect their innovations. Several types of barriers to imitation were identified in the power point lectures, and by Cadot & Lippman (1995). Patent protection was resorted to by Lehn & Fink when it designed its ‘Love My Carpet’ product after Airwick’s ‘Carpet Fresh’ without proper license or other authorization (Crawford & Di Benedetto, 2003, p. 59). Other protections and their examples include trademarks (Coca Cola and Nike), designs (wall lanterns), copyright (works of art, music and literature), circuit layout rights (integrated circuits), plant variety rights (new strains of wheat), and trade secrets and confidential information (the tightly guarded secret formula for Coca Cola). All of these protections against unauthorized appropriation of intellectual property (which is the innovation value) for commercial gain, are legal devices that would penalize violators with stiff penalties and heavy damages. There have been some mechanisms that pertain to first-to-market, or some would label blue ocean, innovations. These are spontaneous advantages enjoyed by the original innovator of a product in an unexplored market without competitors. Natural monopoly occurs when the size of the market would not accommodate another player. Brand image conflict results when companies seeking to imitate cannot reconcile the new blue ocean with their existing image. Rapid cost advantages can result in high volumes generated by large value innovation, crowding out potential imitators. Related to this is long-term contractual relationships struck between the first innovation proponent in the blue ocean and volume suppliers, or network externalities between the innovators and their buyers, which could both lock out potential imitators. Finally, substantial systematic changes that the imitators may have to undertake tend to discourage imitators because of the added cost and disruption it entails. One innovation and the barriers that have protected it One innovation which was effectively protected by barriers to imitation is Coca-Cola. In the lecture notes, Coca-Cola was protected by patent, trade mark, and trade secrets/confidential information. Coca-Cola was invented by John S. Pemberton in 1886. After his death in 1888, pharmacist and Coca Cola proprietor Asa Candler, first advertised the beverage in 1889, and together his brother and a few close friends established the Coca-Cola Company in 1892. The Coca-Cola trademark was in use in the marketplace in 1886, and was first registered in the U.S. Patent Office in 1893 (its registration has periodically been renewed since). By 1945 the shorter trade name Coke® was also registered. The distinctive Coca-Cola bottle with its unique contour has also been protected by registration as a trademark by the U.S. Patent Office as recently as 1977. Most importantly, however, the exact formula of the Coke beverage has been a tightly guarded secret, known only to a select few of the company’s highest executives. After more than 120 years, all these proprietary rights remain intact, and Coca-Cola’s long-term leadership is assured. Are barriers to imitation necessary? The barriers to imitation, although effective at the start, are essentially time-limited: patents expire, blue ocean cost advantages erode, natural monopoly loses ground to an expanding market. With the passage of time, a blue ocean innovation attracts imitators and eventually, the blue ocean becomes red ocean. In other words, any innovation becomes imitated over some period of time, and the proliferation of imitators would tend to erode the profit margins and revenues the company earns from these products. This fact, however, does not diminish the usefulness or necessity of barriers to imitation, both legal and natural, to protect first-to-market innovators. The innovation process requires a large investment commensurate to the high risk of research and development and product conceptualization, and the introduction of the new product in the market likewise faces high risks at the onset. The company needs time to recover its investments in the development phase before imitators take advantage of its hard-earned research and development. Barriers to imitation are capable of allowing the innovator company this time to recover and even maximize its returns, before the inevitable intrusion of ‘riders.’ It is also possible to increase those barriers to stave off imitators, by making timely updates of its innovation and improving its relationship with its users by developing a brand image and reputation that enhances brand loyalty. The barriers will be a useful support to the further development of the five factors critical to market leadership (Tellis & Golder, 1996). Question 4: Innovation Issue: When a Company Should Innovate Innovation requires money. Worse than that, the early stages of innovation requires money but cannot promise that money spent on the project will be earned back. This is because the early conceptualization and research that is devoted to nothing more than a good idea is too far removed from commercialization to provide any clue to its potential to generate revenues. The decision becomes particularly tenuous during an economic downturn when the market softens and the company’s profits dwindle. In the ensuing rush to cut costs, activities such as research and training are usually the first to be discontinued, in an effort to conserve precious funds for overhead and wages. On the other hand, even if the economy were rosy and business was booming, there is also the likelihood that companies may be overspending than would be necessary in researching an idea or developing a product that eventually does poorly in the market. On the matter of researching during lean times when money is sparse, Chesbrough and Garman (2009) urges that companies should continue investing during the tough downturns, because eventually the economy will turn for the better. At that time, those companies which would take advantage of the turnaround and be best positioned for growth are those which have undertaken research and innovation when times were bad. The article gave three examples: the outperformance of the U.S. chemicals industry compared to Britain’s after the first world war; the takeover by Sears as leading retailer over Montgomery Ward after the second world war, and the manner Japan’s semiconductor companies advanced faster than the U.S. companies in the same industry, after the economic downturn in the early eighties. The strategy proposed by Chesbrough and Garman is to explore open innovation, which involves a breaking down of traditional corporate boundaries to allow the free flow of intellectual properties, ideas, and resource persons between organizations and their industry and environment. There is no problem that ‘outside-in’ information flow is to the benefit of the company, because outside ideas are digested by internal design teams without having to go through the uncertain early research stages. However, the reverse ‘inside-out’ information would be met with skepticism because it involves sharing the firm’s own proprietary assets with external entities, including competitors. The suggestion makes sense, however, because by sharing information in joint projects and collaborations, companies share costs and risks during development, and commensurately also share the returns to be realized by a better-quality product. Youngme Moon (2005) reports that contrary to the ‘old life cycle paradigm’ which suggests relegating products to their supposedly inevitable maturity and decline, innovation should be undertaken to enable the rejuvenated product to be repositioned in non-traditional markets, or in unexpected ways so that customers can see it in a different life or for a different purpose. In this regard, reverse positioning may also provide potentials. Reverse positioning involves stripping down the product to the basics and then redefining the attributes the new market wants the product to have. These are specific innovative directions that introduce something new without necessarily overspending on new fundamental research. A broad brushstroke is advocated by Nussbaum, Berner and Brady (2005) who propose that innovative ideas should be pursued wherever and whenever they are encountered, regardless of the economic conditions. The study cites the usefulness of thinking in terms of a ‘paradigm shift’ – that is, thinking beyond the traditional and conventional – largely driven by imagination. It involves creating not only new products, but defining new consumer experiences. It cited the following examples: corner coffee shops as old paradigm and Starbucks as new paradigm; radio as old paradigm, satellite radio as new paradigm; circuses as old paradigm, Cirque du Soleil as new paradigm. To this one might add: personal computers as old paradigm, Apple’s iPad as new paradigm. This strategy is not as simple as introducing improvements on existing products, because merely updating or doing a make-over of an existing product as originally conceived results in a new appearance but the same paradigm. The new experience to be created should be distinctive in itself and differentiated from what the market is used to, sufficient to be identified as a new product altogether (e.g. Starbucks is not just coffee, and the iPhone is not just a cellphone). The consensus among the authors therefore appears to support a permanent and consistent innovation effort, and to pursue innovation and creativity in general as a source of competitive advantage. Innovation is not an auxiliary activity, it is not an appendage to a firm’s operations which may be cut out when the company is strapped for finances. Innovation is as vital to the survival of the company as any of the organic business functions (e.g. finance, operations and marketing), and should remain a cornerstone program of the firm intent on succeeding. References: Chesbrough, H W & Garman, A R 2009 ‘How Open Innovation Can Help You Cope in Lean Times.’ Harvard Business Review, December, pp. 68-76 Crawford, C M & Di Benedetto, C A 2003 New Products Management, 7th ed. McGraw-Hill, Boston. Hippel, E V; Thomke, S; & Sonnack, M 1999 ‘Creating Breakthroughs at 3M.’ Harvard Business Review, September-October, pp. 47-56 Innovation Breakthrough (supplied reading) Nussbaum, B; Berner, R.; Brady, D; and Lloyd, S (ed.) 2005 ‘The Creative Future,’ BRW. Aug 18-24. Pp. 58-62 ‘Patently Aggressive’ 2006 Fast Company. Jan-Feb. pp. 79-81 Tellis, G.J. & Golder, P.N. 1996 ‘First to market, first to fail? Real causes of enduring market leadership.’ Sloan Management Review, Winter, vol. 37, no. 2, p. 65 Ulwick, A.W. 2002 ‘Turn Customer Input into Innovation.’ Harvard Business Review. January. pp. 91-97 Verganti, R. 2011 ‘Designing Breakthrough Products: How companies can systematically create innovations that customers don’t even know what they want.’ Harvard Business Review, October, pp. 115-120 Lecture notes Read More