3.

1 - Innovation: The Creative Pursuit

of Ideas
Opportunity Identification
Opportunity identification is the central domain of entrepreneurship.
The first step for any entrepreneur is the identification of a “good idea.”
Sources of Innovative Ideas
Entrepreneurs, ever alert to opportunities that inhabit the external and internal environments
around them, often spot potential opportunities in all the following areas:

o

 Trends
 Unexpected Occurrences
 Incongruities
 Process Needs
 Industry and Market Changes
 Demographic Changes
 Perceptual Changes
 Knowledge-Based Concepts

click HERE for more details about "Opportunity Identification: The Search for New Ideas"

Entrepreneurial Imagination and Creativity

The key to innovation is blending imaginative and creative thinking with a systematic, logical
process ability.
The Role of Creative Thinking
Creativity is the generation of ideas that results in the improved efficiency or effectiveness of
system.
Two approaches to creative problem solving: adapting or innovating.
The Nature of the Creative Process
Creativity is a process that can be developed and improved.
It is a distinct way of looking at the world that is often illogical, involving seeing
relationships among things that others have not seen.
click HERE for more details about "Entrepreneurial Imagination and Creativity"

Innovation and the Entrepreneur

Innovation is a key function of the entrepreneurship process. It is the process by which
entrepreneurs convert opportunities into marketable ideas.
The Innovation Process
The innovation process is more than just a good idea. Innovation combines the vision to create a
good idea with the perseverance to implement the concept.
Types of Innovation

o
 Invention: Creation of new product service, or process.
 Extension: Expansion of a product, service, or process.
 Duplication: Replication of an already existing product,
service, or process adding own creative touch.
 Synthesis: The combination of existing concepts and factors
into new formulation

3.1.1 Opportunity Identification: The

Search for New Ideas
Opportunity identification is the central domain of entrepreneurship. The first step for any
entrepreneur is the identification of a “good idea.”
Sources of Innovative Ideas
Entrepreneurs, ever alert to opportunities that inhabit the external and internal environments
around them, often spot potential opportunities in all the following areas:
TRENDS
Trends signal shifts in the current paradigms (or thinking) of the major population. Potential
entrepreneurial ideas: social trends, technology trends, economic trends, government trends
UNEXPECTED OCCURRENCES
Unexpected occurrences are the unexpected successes or failures that prove to be a major
surprise.
INCONGRUITIES
Incongruities exist when there is a gap or difference between expectations and reality.
PROCESS NEEDS
Process needs exist whenever there is demand for the entrepreneur to innovate and answer a
particular need.
INDUSTRY AND MARKET CHANGES
There are continual shifts in the marketplace caused by advances in technology, industry growth,
etc. The entrepreneur needs to be able to take advantage of any resulting opportunity.
DEMOGRAPHIC CHANGES
Demographic changes arise from changes in population, age, education, occupation, geographic
locations, etc.
PERCEPTUAL CHANGES
Perceptual changes occur in people’s interpretation of facts and concepts.
KNOWLEDGE-BASED CONCEPTS
Knowledge-based concepts lead to the creation or development of something new.
The Knowledge and Learning Process
Entrepreneurs must be able to learn from their experiences, acquiring and transforming
information, knowledge, and experience into recognizable opportunities through the exercise of
their cognitive abilities.

3.1.2 Entrepreneurial Imagination and

Creativity
The key to innovation is blending imaginative and creative thinking with a systematic, logical
process ability.
The Role of Creative Thinking
Creativity is the generation of ideas that results in the improved efficiency or effectiveness of
system.
Two approaches to creative problem solving: adapting or innovating.
The Nature of the Creative Process
Creativity is a process that can be developed and improved.
It is a distinct way of looking at the world that is often illogical, involving seeing
relationships among things that others have not seen.
The creative process has four commonly agreed-on phases or steps, as itemized below.
PHASE 1: BACKGROUND OR KNOWLEDGE ACCUMULATION
Background or knowledge accumulation provides the individual with a variety of perspectives on
the situation. This helps the entrepreneur develop a basic understanding of the product or venture
to be undertaken.
PHASE 2: THE INCUBATION PROCESS
The incubation process allows the individual to subconsciously mull over the information
gathered during the preparation stage. The individual “sleeps on it.”
PHASE 3: THE IDEA EXPERIENCE
The idea experience is the time when the idea or solution the individual is seeking is discovered.
PHASE 4: EVALUATION AND IMPLEMENTATION
Successful entrepreneurs must be able to identify workable ideas, which they have the skills to
implement.
Developing Your Creativity
To improve one’s creative talents, be aware of some of the habits and mental blocks that stifle
creativity and practice exercises designed to increase creative abilities

3.1.3 Innovation and the Entrepreneur

Innovation is a key function of the entrepreneurship process. It is the process by which
entrepreneurs convert opportunities into marketable ideas.
The Innovation Process
The innovation process is more than just a good idea. Innovation combines the vision to create a
good idea with the perseverance to implement the concept.
Types of Innovation

o Invention: Creation of new product service, or process.
o Extension: Expansion of a product, service, or process.
o Duplication: Replication of an already existing product, service, or
process adding own creative touch.
o Synthesis: The combination of existing concepts and factors into new
formulation

The Major Misconceptions of Innovation


o Misconception 1: Innovation is planned and predictable.
  Truth: Innovation is unpredictable and may be introduced by
anyone.


o Misconception 2: Technical specification should be thoroughly prepared.
 Truth: Quite often it is more important to use a try-test-revise
approach.


o Misconception 3: Innovation relies on dreams and blue-sky ideas.
 Truth: Innovators create from opportunities not daydreams.
o Misconception 4: Big projects will develop better innovations than
smaller ones.
 Truth: Smaller groups foster creative ideas better.
o Misconception 5: Technology is the driving force of innovation success.
 Truth: Not the only source.
 Truth: Market-driven innovations have the highest probability
of success

Principles of Innovation

o Be action-oriented; search for new ideas.
o Make the product, process, or service simple and understandable.
o Make the product, process, or service customer-based.
o Start small; begin small, plan for proper expansion.
o Aim high; seek a niche in the marketplace.
o Try-test-revise; help work out flaws.
o Learn from failures.
o Follow a milestone schedule; have schedule in order to plan and evaluate
the project.
o Reward heroic activity and give it respect.
o Work, work, work!

The Challenge of New Venture Start-ups and Pitfalls

in Selecting New Ventures
400,000 new firms have emerged every year since 2010; that works out to approximately 1,100
business start-ups per day. The reasons that entrepreneurs start new ventures are similar to the
characteristics (as discussed in previews modules) on the entrepreneurial mind-set:
(1) The need for approval
(2) The need for independence
(3) The need for personal development
(4) Welfare (philanthropic) considerations
(5) Perception of wealth
(6) Tax reduction and indirect benefits
(7) Following role models

Pitfalls in Selecting New Ventures

Six of the most important pitfalls commonly encountered in the process of selecting a new
venture are listed below.
1. Lack of Objective Evaluation
2. No Real Insight into the Market
3. Inadequate Understanding of Technical Requirements
4. Poor Financial Understanding
5. Lack of Venture Uniqueness
6. Ignorance of Legal Issues
click HERE for more details about "The Challenge of New Venture Start-Ups and Pitfalls in
Selecting New Ventures"

Critical Factors for New Venture Development

Critical Factors for New-Venture Development
Five factors are critical during the prestart-up and start-up phases of a new venture:

1.
1.
1. The relative uniqueness of the venture,
2. The relative investment size at start-up,
3. The expected growth of sales and/or profits as the venture
moves through its start-up phase,
4. The availability of products during the prestart-up and start-up
phases,
5. The availability of customers during the prestart-up and start-
up phases.

Uniqueness
Range of uniqueness in a new venture can be considerable. Uniqueness is further characterized
by the length of time a nonroutine venture will remain nonroutine.
Investment
Required capital investment can vary considerably. Extent and timing of funds needed is critical.
Key questions to ask to determine the amount of funding needed during the start-up phase:
 
o

 Will industry growth be sufficient to maintain
break-even sales to cover a high fixed cost
structure during the start-up period?
 Do the principal entrepreneurs have access to
substantial financial reserves to protect a large
initial investment?
 Do the entrepreneurs have the appropriate contacts
to take advantage of various environmental
opportunities?
 Do the entrepreneurs have both industry and
entrepreneurial track records which justify the
financial risk of a large-scale start-up?

click HERE to continue reading more details about Critical Factors for New Venture
Development

Why New Ventures Fail

Every year millions of dollars are spent on starting new enterprises, but only a small percentage
of new businesses is successful.
Most studies have found that the factors underlying the failure of new ventures are within the
control of the entrepreneur.
Three major categories of causes for failure:
1. Product/Market Problems
2. Financial Difficulties
3. Managerial Problems

The Traditional Venture Evaluation Processes

A critical task of starting a new business is conducting solid analysis of the feasibility of the
product/service in getting off the ground.
Profile Analysis Approach
Different variables, which enable the entrepreneur to judge the potential of the business, need to
be investigated before the new idea is put into practice. An internal profile analysis (provided as
an experiential exercise at the end of the chapter) takes a checklist approach, allowing
entrepreneurs to identify major strengths and weaknesses of a new venture, and can be used to
assess the financial, marketing, organizational, and human resources aspects of the new venture.
Feasibility Criteria Approach
Key questions to ask:

o


 Is it proprietary?


o


 Are the initial production costs
realistic?


o


 Are the initial marketing costs
realistic?


o


 Does the product have potential for
very high margins?


o


 Is the time required to get to market
and to reach break-even realistic?


o


 Is the potential market large?


o


 Is the product the first of a growing
family?
  Does an initial customer exist?
 Are the development costs and calendar
times realistic?


o


 Is this a growing industry?
 Can the product—and the need for it—
be understood by the financial
community?

Comprehensive Feasibility Approach

Incorporates external factors in addition to those included in the criteria questions cited above
and looks at technical, market, financial, organizational, and competitive factors. . Technical
feasibility and marketability merit special attention.
click HERE for more details about "The Traditional Venture Evaluation Processes"

The Contemporary Methodologies for Venture

Evaluation
With newer movements taking shape in the everchanging entrepreneurial world such as design
methods to lean start-up procedures, the fast paced entrepreneurial environment is demonstrating
newer methods to enhance venture concepts through development.
The Design Methodology
Demand for design is becoming so great that universities are now building programs to approach
design rather than concentrating it in just technical schools.
DESIGN DEVELOPMENT
Utilizes skills we all possess but are generally ignored due to more conventional problem solving
practices. Takes the initial concept idea and develops a proof of concept that elicits feedback
from relevant stakeholders.

o


 Proof of Concept Feasibility
 Proof of Concept Desirability
 Proof of Concept Viability

Design-Centered Entrepreneurship
The entrepreneur applies design methods in four action stages of developing an opportunity.

o


 Ideation
 Prototyping
 Market engagement
 Business model

The Lean Start-up Methodology

Provides a scientific approach to creating early venture concepts and delivers a desired product
to customer’s hands faster. This methodology is hypothesis-driven, and entrepreneurs must work
to gather and incorporate customer feedback early and often.
KEY LEAN START-UP KEY TERMINOLOGY
The Three A’s of Matrics:

o
 Actionable
 Accessible
 Auditable

3.2.1 The Challenge of New Venture

Start-Ups and Pitfalls in Selecting
New Ventures
400,000 new firms have emerged every year since 2010; that works out to approximately 1,100
business start-ups per day. The reasons that entrepreneurs start new ventures are similar to the
characteristics (as discussed in previews modules) on the entrepreneurial mind-set:
(1) The need for approval
(2) The need for independence
(3) The need for personal development
(4) Welfare (philanthropic) considerations
(5) Perception of wealth
(6) Tax reduction and indirect benefits
(7) Following role models
Pitfalls in Selecting New Ventures
Six of the most important pitfalls commonly encountered in the process of selecting a new
venture are listed below.
1. Lack of Objective Evaluation

o
 Many entrepreneurs lack objectivity.
 All ideas should be subject to rigorous study and investigation.

2. No Real Insight into the Market


o
 Entrepreneurs must project the life cycle of the new product.
 Timing of product is critical.

3. Inadequate Understanding of Technical Requirements


o
 Entrepreneurs need to be thorough in studying a new product.
 Unexpected technical difficulties frequently pose time-
consuming and costly problems.

4. Poor Financial Understanding


o
 Entrepreneurs are sometimes ignorant of costs.
 Entrepreneurs are sometimes victims of inadequate research
and planning.
 Entrepreneurs quite often underestimate development costs by
wide margins.

5. Lack of Venture Uniqueness


o
 A new venture should be unique.
 Product differentiation is needed to separate product from
those of competitors.

6. Ignorance of Legal Issues

Business is subject to many legal requirements:
 
o

 A safe workplace
 Reliable and safe products and services
 Necessity for trademarks, patents, and copyrights

3.2.2 Critical Factors for New Venture

Development
Five factors are critical during the prestart-up and start-up phases of a new venture:
(1) the relative uniqueness of the venture,
(2) the relative investment size at start-up,
(3) the expected growth of sales and/or profits as the venture moves through its start-up phase,
(4) the availability of products during the prestart-up and start-up phases, and
(5) the availability of customers during the prestart-up and start-up phases.

Uniqueness
Range of uniqueness in a new venture can be considerable.
Uniqueness is further characterized by the length of time a non-routine venture will remain non-
routine.

Investment
Required capital investment can vary considerably.
Extent and timing of funds needed is critical.
Key questions to ask to determine the amount of funding needed during the start-up phase:

o
 Will industry growth be sufficient to maintain break-even sales
to cover a high fixed cost structure during the start-up period?
 Do the principal entrepreneurs have access to substantial
financial reserves to protect a large initial investment?
 Do the entrepreneurs have the appropriate contacts to take
advantage of various environmental opportunities?
 Do the entrepreneurs have both industry and entrepreneurial
track records which justify the financial risk of a large-scale
start-up?

Growth of Sales
Key questions to ask about growth of sales during the start-up phase:

o
 What is the growth pattern anticipated for new-venture sales
and profits?
 Are sales and profits expected to grow slowly or level off
shortly after start-up?
 Are large profits expected at some point with only small or
moderate sales growth?
 Are both high sales growth and high profit growth likely?
 Will there be limited initial profits with eventual high-profit
growth over a multiyear period?

In answering these questions, it is important to remember that most ventures fit into one of the
three following venture classifications:

o
 Lifestyle ventures
 Independence, autonomy, and control are the primary driving
forces.
 Sales and profits are deemed to provide a sufficient and
comfortable living for the entrepreneur.
 Small profitable ventures
 Financial considerations play a major role.
 Autonomy and ownership control are important factors.
 High-growth ventures
 Significant sales and profit growth are expected.
 May be possible to attract venture capital money.
 May be possible to attract funds raised through public or
private placements.

Product Availability

o Goods or services must be available.
o Lack of product availability can affect the company’s image and its
bottom line.

Customer availability

o Risk continuum (two extremes):
o Customers willing to pay cash before delivery.
o Venture begun not knowing exactly who will buy the product.
o Two critical considerations:
o How long will it take to determine who the customers are?
 o What are the customers’ buying habits?

3.2.3 Why New Ventures Fail

Every year millions of dollars are spent on starting new enterprises, but only a small percentage
of new businesses is successful.
Most studies have found that the factors underlying the failure of new ventures are within the
control of the entrepreneur.
Three major categories of causes for failure:

 product/market problems
 financial difficulties
 managerial problems

3.2.4 The Traditional Venture

Evaluation Processes
A critical task of starting a new business is conducting solid analysis of the feasibility of the
product/service in getting off the ground.
Profile Analysis Approach
Different variables, which enable the entrepreneur to judge the potential of the business, need to
be investigated before the new idea is put into practice.
An internal profile analysis (provided as an experiential exercise at the end of the chapter) takes
a checklist approach, allowing entrepreneurs to identify major strengths and weaknesses of a new
venture, and can be used to assess the financial, marketing, organizational, and human resources
aspects of the new venture.
Feasibility Criteria Approach
Key questions to ask:

o Is it proprietary?
 Should permit a long head start against competitors.
 Should permit a period of extraordinary profits early to offset
start-up costs.


o Are the initial production costs realistic?
 Most estimates are too low.
  Careful detailed analysis should be made.


o Are the initial marketing costs realistic?
 Identify target markets.
 Identify market channels.
 Identify promotion strategy.


o Does the product have potential for very high margins?
 A necessity for a fledgling company
 Gross margins are important.


o Is the time required to get to market and to reach break-even realistic?
 The faster, the better.
 An error here can spell trouble later on.


o Is the potential market large?
 Must look three to five years into the future
 Market needs time to emerge.


o Is the product the first of a growing family?
o Does an initial customer exist?
o Are the development costs and calendar times realistic?
 Preferably, they are zero.
 A ready-to-go product gives the venture a big advantage over
competitors.


o Is this a growing industry?
o Can the product—and the need for it—be understood by the financial
community?

Comprehensive Feasibility Approach

Incorporates external factors in addition to those included in the criteria questions cited above
and looks at technical, market, financial, organizational, and competitive factors. . Technical
feasibility and marketability merit special attention.
TECHNICAL FEASIBILITY

 Functional design of the product and attractiveness in appearance

 Flexibility for ready modification
 Durability of the materials from which the product is made
  Reliability
 Product safety
 Reasonable utility
 Ease and low cost of maintenance
 Standardization
 Ease of processing or manufacture
 Ease in handling and use

MARKETABILITY
Three major areas involved:

1. Investigating the full market potential and identifying customers (or users) for the
goods or service,
2. Analyzing the extent to which the enterprise might exploit this potential market, and
3. Using market analysis to determine the opportunities and risk.

General information sources to consider:

 General economic trends

 Market data
 Pricing data
 Competitive data

3.2.5 The Contemporary

Methodologies for Venture Evaluation
With newer movements taking shape in the everchanging entrepreneurial world such as design
methods to lean start-up procedures, the fast paced entrepreneurial environment is demonstrating
newer methods to enhance venture concepts through development.
The Design Methodology
Demand for design is becoming so great that universities are now building programs to approach
design rather than concentrating it in just technical schools.
DESIGN DEVELOPMENT
Utilizes skills we all possess but are generally ignored due to more conventional problem solving
practices.
Takes the initial concept idea and develops a proof of concept that elicits feedback from relevant
stakeholders.

o Proof of Concept Feasibility
 o Proof of Concept Desirability
o Proof of Concept Viability

Design-Centered Entrepreneurship
The entrepreneur applies design methods in four action stages of developing an opportunity.

o Ideation
o Prototyping
o Market engagement
o Business model

The Lean Start-up Methodology

Provides a scientific approach to creating early venture concepts and delivers a desired product
to customer’s hands faster.
This methodology is hypothesis-driven, and entrepreneurs must work to gather
and incorporate customer feedback early and often.
KEY LEAN START-UP KEY TERMINOLOGY
The Three A’s of Matrics:

 Actionable
 Accessible
 Auditable

Pivot
Build-Measure-Learn Feedback Loop
Validated Learning