INNOVATION AND THE MARKET PLACE

Defining innovation
 In its broadest sense, the term innovation comes from the Latin innovare meaning ‘to make
something new’.
 Modern day understanding is that innovation is a process of turning ideas into new
opportunities for value creation and of putting these into widely used practice.
 The terms innovation and creativity are often used interchangeably.
 In the context of small business management and entrepreneurship it is helpful to distinguish
between them:
o Creativity is the generation of new ideas.
o Innovation is the successful exploitation of new ideas.
 The process of entrepreneurship relies on the creativity of those individuals involved, in
terms of coming up with the original ideas for new products and services in the first place.
 This is only one side of the story, however. Entrepreneurship involves the successful
exploitation of these ideas. In a market context, this involves the successful exchange of new
products or service or what we refer to as innovation.
 It is widely acknowledged that innovation plays a central role in the competitiveness of firms
and countries. Innovation is understood to be a key driver of productivity. Innovation helps
businesses to improve the way that products and services are made and delivered, or to
introduce entirely new ones.
 Evidence suggests that innovating companies sustain a higher performance and grow faster
than non-innovators. Innovation has defined broadly as the successful exploitation of ideas-or
turning ideas into profitable products, processes , services or business practices. In other
words, an innovation has been commercialized whereas an invention has not.
 Innovation is an important concept that can be thought of in a number of fundamentally
different ways. Three main conceptualizations have usefully been put forward. These
include; innovation as achievement, the consequences or impacts that arise from
achievements and the capacity to change or innovation as dynamic capabilities.

i) Innovation as Achievement
 Innovation involve achieving significant leaps forward in the use of technology, or the re-
conceptualization of existing problems in a way that liberates the creator from existing
technological systems.
 New technologies tend to evolve over time rather than in sudden leaps forward since they
usually rely on cumulative and path-dependent associations of people, ideas and objects. One
reason for this gradual evolution is because the introduction of a new technology is
essentially a risky process-both in terms of technological uncertainties (will it work?) and
market uncertainties (will it sell-and if so, how quickly?).

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ii) Innovations as the consequences as Achievements
 To talk of a great innovation is to talk of something that has the potential to make significant
commercial and/or social impact.
 Very often this type of impact is unintended-and can far outreach the expectations of the
original innovator. In reflecting on great innovations (such as the telephone, the car,
semiconductors, etc.) we tend to think about the impact or consequences of the innovation
which were rarely (if ever) anticipated at the time the innovation was first introduced.
 For economists, the unintended consequences that benefit everyone are called spillovers or
positive externalities. Innovations tend to have these positive externalities.

iii) Innovation as Dynamic Capabilities

 Perhaps the most compelling conceptualization of innovation is captured in the idea of
innovation as the capacity to change.
 In effect, innovation (like entrepreneurship) is here understood as a process, or a mindset that
encourages or enables a specific set of dynamic and purposeful behaviors and practices.
 The innovative small business is one that is alive to change and flexible in its approach to it-
it has dynamic capabilities. Innovation is dependent on the ability and willingness to learn.
Innovation, then, can be managed proactively.

The seven sources for innovative opportunity

 How can the owner-manager ensure a continuous, systematic search for innovation? The
would be innovator can look at changes in what already exists to give clues as to what
opportunities may exist in the future.
 Innovation uses and builds on changes that already taking place. For instance, the Wright
brothers’’ Aeroplane exploited the earlier invention of the internal combustion engine by
linking it to advances in the understanding of aerodynamics. The development of out-of-town
superstores capitalized on changes caused by the widespread ownership of the motor car: the
advantage of increased personal mobility linked to the disadvantages of congestion in town
centers.
 The successful entrepreneur investigates and analyses change in order to find opportunities
for innovation.
 Drucker (1985) has identified seven sources for innovative opportunity:

Drucker’s seven sources:

1. The unexpected
2. The incongruous
3. Process need
4. Industry and market structures

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5. Demographics
6. Changes in perception
7. New knowledge

1. The unexpected
 A very common indicator of underlying change is the unexpected result.
 Unexpected success, or failure, often gives clues to underlying trends which can lead to
innovation. A classic example of the unexpected is the development of the PC (personal
computers). Early computers were designed exclusively for scientific purposes and it came as
something of a surprise to IBM when business customers started to express interest in the
new computer equipment.

2. The incongruous
 An incongruous event or result is discrepancy between what is and what everyone expects.
 It occurs when there is a difference between reality and everyone’s assumption about that
reality.
 It is also an important source of innovation because incongruity is a further sign that changes
are taking place.
 Unlike the unexpected it is, however, it is more difficult to quantify; it is not likely to show
up in a report of sales figures. Rather, it represents shift in perception or attitudes.
3. Process need
 The importance of need as a source of innovation is captured in the proverb: “Necessity is the
mother of invention”.
 Innovation from process need improves an existing process which is recognized as having
significant limitations. It takes new, often unrelated developments to revolutionize an
existing process or way of doing something.

4. Industry and market structures

 Whole industry and market structures can change rapidly, sometimes after long period of
stability. Such changes offer exceptional opportunities to innovators and considerable threat
to those who incorrectly read the changes
 Changing industry and market structures frequently give the small business entrepreneur
opportunities to benefit from the sluggishness of larger, existing suppliers who often view
structural change as threats to be resisted, rather than a chance to innovate.

5. Demographics
 Changes to the environment of an enterprise inevitably contain many possibilities for
innovation, but are often hard to see, or understand, until they are past and the opportunity
missed.
 Demographic changes, however, are clear and unambiguous, and signaled well in advance.

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 Demography is the study of statistics of the population births, deaths, diseases, employment,
education, income and the trends which these figures show.
 These statistics are universally accepted as key indicators of demand changes within society
which are often highly predictable. For instance, a high birth rate in one year will inevitably
mean an increased need for first school places four to five years later. Lower death rates and
longer life expectancy will be sure to create more demand for retirement homes and old age
care facilities.

6. Changes in perception
 Some changes are not really changes at all. The facts do not change, but people’s perception
of the facts change, which has equally powerful effect.
 The fashion industry relies heavily on changes in perception. Clothes from an earlier
generation do not change, but our perceptions of them do. We regard the trendy garments of
yesterday as comically out of date today.
 Changes in perception give the entrepreneur many new openings. Today we perceive an
urgent need to protect our environment, a notion that had little following a decade or so ago.
Anita Roddick sensed this shift in values well before it became common policy to have green
products, in creating the Body Shop.
 The skillful innovator will be careful to differentiate between temporary changes in
perception, or ‘fads’ and longer lasting developments.

7. New knowledge
 The most famous innovations are often based on new knowledge, or inventions. For
instance, the first telephone made by Alexander Graham Bell, the light bulb demonstrated by
Thomas Edison, the radio messages of Guglielmo Marconi and the early television
transmissions of John Logie Baird are all well known. In fact, all of these examples still rely
to some extent on the meeting of existing ideas for the first time.
 But despite the publicity, knowledge-based innovations are the most problematic and, in
many respects, the least attractive to entrepreneurs.
 The time between new knowledge being available and its successful development into
marketable products is long. For instance, the idea of using radio waves to transmit visual
information was around in the early days of radio in the 1890s, but only became practical
with the first television transmission in 1926.
 Innovations based on new knowledge also require not just one independent discovery, but the
bringing together of several developments. Baird’s first television, itself based on earlier
research on radio waves, scanned an image into line dots of light by a mechanical method.
More sophisticated electronic systems were required before television could become an
acceptable product, a decade or so after the first transmission.