Chapter One

The Innovation Imperative

LEARNING OBJECTIVES

By the end of this chapter you will develop an understanding of:

 What ‘innovation’ and ‘entrepreneurship’ mean – and how they are essential for survival
and growth
 Innovation as a process rather than a single flash of inspiration
 The difficulties in managing what is an uncertain and risky process
 The key themes in thinking about how to manage this process effectively.

1.1. What is Innovation

One of the problems in managing innovation is variation in what people understand by the term,
often confusing it with invention. In its broadest sense, the term comes from the Latin – innovare
meaning “to make something new.” Our view, shared by the following writers, assumes that
innovation is a process of turning opportunity into new ideas and of putting these into widely
used practice.
“Innovation is the successful exploitation of new ideas.”

– Innovation Unit, UK Department of Trade and Industry (2004)

“Innovation is the specific tool of entrepreneurs, the means by which they exploit
change as an opportunity for a different business or service. It is capable of being
presented as a discipline, capable of being learned, capable of being practiced.”
– Peter Drucker (1985)

1.2. Invention vs. Innovation

One of America’s most successful innovators was Thomas Alva Edison, who during his life
registered over 1000 patents. Products for which his organization was responsible include the
light bulb, 35 mm cinema film, and even the electric chair. Edison appreciated better than most
that the real challenge in innovation was not invention – coming up with good ideas – but in
making them work technically and commercially.
Innovation is more than simply coming up with good ideas; it is the process of growing them
into practical use. Definitions of innovation may vary in their wording, but they all stress the
need to complete the development and exploitation aspects of new knowledge, not just its
invention.
In fact, some of the most famous inventions of the nineteenth century came from men whose
names are forgotten; the names that we associate with them are of the entrepreneurs who brought
them into commercial use. For example, the vacuum cleaner was invented by one J. Murray
Spengler and originally called an “electric suction sweeper.” He approached a leather goods
maker in the town who knew nothing about vacuum cleaners but had a good idea of how to
market and sell them – a certain W. H. Hoover. Similarly, a Boston man called Elias Howe
produce the world’s first sewing machine in 1846. Unable to sell his ideas despite traveling to
England and trying there, he returned to the United States to find that one Isaac Singer had stolen
the patent and built a successful business from it. Although Singer was eventually forced to pay
Howe a royalty on all machines made, the name that most people now associate with sewing
machines is Singer not Howe. And Samuel Morse, widely credited as the father of modern
telegraphy, actually invented only the code that bears his name; all the other inventions came
from others. What Morse brought was enormous energy and a vision of what could be
accomplished; to realize this, he combined marketing and political skills to secure state funding
for development work and to spread the concept of something that for the first time would link
up people separated by vast distances on the continent of America. Within 5 years of
demonstrating the principle, there were over 5000 miles of telegraph wire in the United States.
And Morse was regarded as “the greatest man of his generation”

1.3. Innovation Matters

You don’t have to look far before you bump into the innovation imperative. It leaps out at you
from a thousand mission statements and strategy documents, each stressing how important
innovation is to ‘our customers/our shareholders/our business/our future’ and, most often, ‘our
survival and growth’. Innovation shouts at you from advertisements for products ranging from
hairspray to hospital care. It nestles deep in the heart of our history books, pointing out how far
and for how long it has shaped our lives. And it is on the lips of every politician, recognizing that
our lifestyles are constantly shaped and reshaped by the process of innovation.

Innovation is strongly associated with growth. New business is created by new ideas, by the
process of creating competitive advantage in what a firm can offer. While competitive advantage
can come from size, or possession of assets, and so on, the pattern is increasingly coming to
favor those organizations that can mobilize knowledge and technological skills and experience to
create novelty in their offerings (product/service) and the ways in which they create and deliver
those offerings. Economists have argued for decades over the exact nature of the relationship, but
they have generally agreed that innovation accounts for a sizeable proportion of economic
growth.
“Virtually all of the economic growth that has occurred since the eighteenth century is
ultimately attributable to innovation.”
William Baumol (2002)

Innovation makes a huge difference to organizations of all shapes and sizes. The logic is simple – if we
don’t change what we offer the world (products and services) and how we create and deliver them, we
risk being overtaken by others who do. At the limit, it’s about survival, and history is very clear on this
point: survival is not compulsory! Those enterprises that survive do so because they are capable of regular
and focused change.
It’s worth noting that Bill Gates used to say of Microsoft that it was always only 2 years away from
extinction. Or, as Andy Grove, one of the founders of Intel, pointed out in his autobiography, “only the
paranoid survive!”

Industrial innovation includes the technical, design, manufacturing, management and commercial
activities involved in the marketing of a new (or improved) product or the first commercial use of
a new (or improved) process or equipment. Innovation is the specific tool of entrepreneurs, the
means by which they exploit change as an opportunity for a different business or service. It is
capable of being presented as a discipline, capable of being learned, capable of being practiced.
1.4. Innovation and Entrepreneurship

Innovation matters – but it doesn’t happen automatically. It is driven by entrepreneurship. A

potent mixture of vision, passion, energy, enthusiasm, insight, judgment and plain hard work
which enables good ideas to become reality. The power behind changing products, processes and
services comes from individuals whether acting alone or embedded within organizations who
make innovation happen. As the famous management writer Peter Drucker put it: 4 Innovation is
the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for
a different business or service. It is capable of being presented as a discipline, capable of being
learned, capable of being practiced.

Entrepreneurship plays out on different stages in practice. One obvious example is the start-up
venture in which the lone entrepreneur takes a calculated risk to bring something new into the
world. But entrepreneurship matters just as much to the established organization which needs to
renew itself in what it offers and how it creates and delivers that offering. Internal entrepreneurs
often labeled as ‘intrapreneurs’ or working in ‘corporate entrepreneurship’ or ‘corporate venture’
departments – provide the drive, energy and vision to take risky new ideas forward within that
context.6 And of course, the passion to change things may not be focused on creating
commercial value but rather on improving conditions or enabling change in the wider social
sphere or in the direction of environmental sustainability – a field which has become known as
‘social entrepreneurship’

1.5. Innovation Isn’t Easy!

Innovation is strongly associated with growth. New business is created by new ideas, by the
process of creating competitive advantage in what a firm can offer. While competitive advantage
can come from size, or possession of assets, and so on, the pattern is increasingly coming to
favor those organizations that can mobilize knowledge and technological skills and experience to
create novelty in their offerings (product/service) and the ways in which they create and deliver
those offerings. Economists have argued for decades over the exact nature of the relationship, but
they have generally agreed that innovation accounts for a sizeable proportion of economic
growth.
“Virtually all of the economic growth that has occurred since theeighteenth century is
ultimately attributable to innovation.”
William Baumol (2002)

Innovation makes a huge difference to organizations of all shapes and sizes. The logic is simple – if we
don’t change what we offer the world (products and services) and how we create and deliver them, we
risk being overtaken by others who do. At the limit, it’s about survival, and history is very clear on this
point: survival is not compulsory! Those enterprises that survive do so because they are capable of regular
and focused change.
It’s worth noting that Bill Gates used to say of Microsoft that it was always only 2 years away from
extinction. Or, as Andy Grove, one of the founders of Intel, pointed out in his autobiography, “only the
paranoid survive!”
Coming up with good ideas is what human beings are good at – we have this facility already
fitted as standard equipment in our brains! But taking those ideas forward is not quite so simple,
and most new ideas fail. It takes a particular mix of energy, insight, belief and determi-nation to
push against these odds; it also requires judgement to know when to stop banging against the
brick wall and move on to something else. It’s important here to remember a key point: new
ventures often fail, but it is the ventures which are failures rather than the people who launched
them. Successful entrepreneurs recognize that failure is an intrinsic part of the process. They
learn from their mistakes, understanding where and when timing, market conditions,
technological uncertainties, etc. mean that even a great idea isn’t going to work. But they also
recognize that the idea may have had its weaknesses but that they have not failed themselves but
rather learnt some useful insights to carry over to their next venture. While the road for an
individual entrepreneur may be very rocky with a high risk of hit-ting potholes, running into
roadblocks or careering off the edge, it doesn’t get any easier if you are a large established
company. It’s a disturbing thought but the majority of companies have a lifespan significantly
less than that of a human being. Even the largest firms can show worrying signs of vulnerability,
and for the smaller firm the mortality statistics are bleak. Many SMEs fail because they don’t see
or recognize the need for change. They are inward looking, too busy fighting fires and dealing
with today’s crises to worry about storm clouds on the horizon. Even if they do talk to others
about the wider issues, it is very often to people in the same network and with the same
perspectives, for example the people who supply them with goods and services or their
immediate customers. The trouble is that by the time they realize there is a need to change it may
be too late.

1.6. Managing Innovation and Entrepreneurship

The dictionary defines ‘innovation’ as ‘change’; it comes from Latin in and novare, meaning ‘to
make something new’. That’s a bit vague if we’re trying to manage it; perhaps a more useful
definition would be ‘the successful exploitation of new ideas’. Those ideas don’t necessarily
have to be completely new to the world, or particularly radical; as one definition has it:
‘innovation does not necessarily imply the commercialization of only a major advance in the
technological state of the art (a radical innovation) but it includes also the utilization of even
small-scale changes in technological know-how (an improvement or incremental innovation).’
Whatever the nature of the change the key issue is how to bring it about, in other words how to
manage innovation. Can we do it? One answer comes from the experiences of organizations that
have survived for an extended period of time. While most organizations have comparatively
modest lifes-pans, some have survived at least one and sometimes multiple centuries. Looking at
the experience of these ‘100 club’ members – firms like 3M, Corning, Procter and Gamble,
Reuters, Siemens, Philips and Rolls-Royce – we can see that much of their longevity is down to
having developed a capacity to innovate on a continuing basis. They have learnt, often the hard
way, how to manage the process and, importantly, how to repeat the trick. Any organization can
get lucky once but sustaining it for a century or more suggests there’s a bit more to it than that.
It’s the same with individuals: ‘serial entrepreneurs’ may start many different businesses and
what they bring to the party is an accumulated understanding of how to do it better. They have
learnt and built long-term capability into a robust set of skills. Over the past hundred years, there
have been many attempts to answer the question of whether we can manage innovation.
Researchers have looked at case examples, at sectors, at entrepreneurs, at big firms and small
firms, at success and failure. Practicing entrepreneurs and innovation managers in large
businesses have tried to reflect on the ‘how’ of what they do. The key messages come from the
world of experience. What we’ve learnt comes from the laboratory of practice rather than some
deeply rooted theory. The key messages from this knowledge base are that successful innovators:
• explore and understand different dimensions of innovation (ways in which we can change
things)

• manage innovation as a process

• create conditions to enable them to repeat the innovation trick (building capability)

• focus this capability to move their organizations forward (innovation strategy)

• build dynamic capability (the ability to rest and adapt their approaches in the face of a changing
environment).

1.6.1. Innovation management is the process of managing innovations, that is, ideas,
in organisations through the stages of the innovation cycle.
The innovation cycle describes the activities involved in taking an innovative product
or service to the marketplace. In essence, there are two aspects to this:
1. Developing the innovative product or service.
2. Building the business to market the product or service.

The chart below provides an example of a typical innovation cycle with activities at each stage:

Stage Description Typical activities

1 Ideas Identify a market opportunity
2 Resources Organise people, finance and facilities to
match the goals of the organisation
3 Investigate Research the possibilities
4 Patent Protect the intellectual property
5 Design Model and test it for users
6 Develop Improve the technology
7 Make Start production
8 Sell Advertise and inform people
9 Service Communicate with the customers

The first stage in the innovation cycle is ideas generation. Ideas will often arise from observation
of a current or future problem. They could be inspired by the organization’s objectives or by a
new market situation that suddenly becomes an opportunity
Once the opportunity has been recognised, it needs to be evaluated. An important test
for an idea is that it matches the goals of the organisation and available resources –
people, finance and facilities.
If there is alignment with the objectives of the organisation, the idea moves to a new
stage where it can be investigated and further developed. The development phase
may involve further research into the opportunity or the patenting of the concept.
Prototypes may well be designed, developed and tested at this stage.
The decision to start selling the innovation is a critical stage. This is when significant
resources are often required to support the launch. Sometimes an organisation might
wait at the end of the development phase for suitable market conditions.
1.7. Dimensions of Innovation

Essentially, we are talking about change, and this can take several forms; for the purposes of this
book, we will focus on four broad categories:
1. Product innovation: changes in the things (products/services) that an organization
offers. For example, a new design of car, a new insurance package for accident-prone
babies, and a new home entertainment system would all be examples of product
innovation.
2. Process innovation: changes in the ways in which they are created and delivered. For
example, a change in the manufacturing methods and equipment used to produce the car
or the home entertainment system, or in the office procedures and sequencing in the
insurance case, would be examples of process innovation
3. Position innovation: changes in the context in which the products/services are
introduced. Innovation can also take place by repositioning the perception of an
established product or process in a particular user context.
4. Paradigm innovation: changes in the underlying mental models that frame what the
organization does. Sometimes, opportunities for innovation emerge when we reframe the
way we look at something. Henry Ford fundamentally changed the face of transportation.
Recent examples of “paradigm” innovation – changes in mental models – include the
shift to low-cost airlines, the provision of online insurance and other financial services,
and the repositioning of drinks such as coffee and fruit juice as premium “designer”
products.
5. Business model innovation – changing the way business is done, for example, Easy Jet,
Dell computers and global outsourcing.
 6. Marketing innovation – developing alternative marketing techniques to
deliver improvements in price, position, packaging, product design or
promotion.

7. Supply chain innovation – improving the way that materials are sourced
from suppliers or improving methods of product delivery to customers.

8. Financial innovation – bringing together basic financial concepts. This

might include credit, risk-sharing, ownership or liquidity to produce new
financial services, products or ways of managing business operations. For
example, financial innovation adapts to new circumstances and develops new
value chains as the compliance and legislative environment evolves.

1.8. A Process Model for Innovation and Entrepreneurship

Rather than the cartoon image of a light bulb flashing on above someone’s head, we need to
think about innovation as an extended sequence of activities – as a process. Whether we are
looking at an individual entrepreneur bringing their idea into action or a multi-million-dollar
corporation launching the latest in a stream of new products, the same basic framework applies.
We can break it down to the four key steps we mentioned earlier:

• recognizing the opportunity

• finding the resources

• developing the idea

• capturing value.

Recognizing the Opportunity

Innovation triggers come in all shapes and sizes and from all sorts of directions. They could take
the form of new technological opportunities or changing requirements on the part of markets.
They could be the result of legislative pressure or competitor action. They could be a bright idea
occurring to someone as they sit, Archimedes-like, in their bathtub. They could come as a result
of buying in a good idea from someone outside the organization. Or they could arise from
dissatisfaction with social conditions or a desire to make the world a better place in some way.

Finding the Resources

The trouble with innovation is that it is by its nature a risky business. You don’t know at the
outset whether what you decide to do is going to work out or even that it will run at all. Yet you
have to commit some resources to begin the process. So how do you build a portfolio of projects
which balance the risks and the potential rewards? (Of course, this decision is even tougher for
the first-time entrepreneur trying to launch a business based on his or her great new idea – the
choice there is whether to go forward and commit what may be a huge investment of personal
time, the mortgage, family life, etc. Even if they succeed, there is then the problem of trying to
grow the business and needing to develop more good ideas to follow the first.) So this stage is
very much about strategic choices. Does the idea fit a business strategy, does it build on
something we know about (or where we can get access to that knowledge easily) and do we have
the skills and resources to take it forward? And if we don’t have those resources, which are often
the case with the lone entrepreneur at start-up, how will we find and mobilize them?

Developing the Idea

Having picked up relevant trigger signals, made a strategic decision to pursue some of them and
found and mobilized the resources we need, the next key phase is actually turning those potential
ideas into some kind of reality. In some ways this implementation phase is a bit like making a
kind of ‘knowledge tapestry’, by gradually weaving the different threads of knowledge (about
technologies, markets, competitor behaviour, etc.) into a successful innovation. Early on it is full
of uncertainty but gradually the picture becomes clearer – but at a cost. We have to invest time
and money and find people to research and develop ideas and conduct market studies, competitor
analysis, prototyping, testing, etc. in order to gradually improve our understanding of the
innovation and whether it will work. Eventually, it is in a form which can be launched into its
intended context – an internal or external market – and then further knowledge about its adoption
(or otherwise) can be used to refine the innovation. Developing a robust business plan which
takes all of this into consideration at the outset is one of the key elements in entrepreneurial
success.

Throughout this implementation phase, we have to balance creativity – finding bright ideas and
new ways to get around the thousand and one problems which emerge and get the bugs out of the
system – with control – making sure we keep to some kind of budget on time, money and
resources. This balancing act means that skills in project management around innovation, with
all its inherent uncertainties, are always in high demand! This phase is also where we need to
bring together different knowledge sets from many different people – so combining them in ways
which help rather than hinder the process and raise big questions around teambuilding and
management. It would be foolish to throw good money after bad, so most organizations make
use of some kind of risk management as they implement innovation projects. By installing a
series of ‘gates’ as the project moves from a gleam in the eye to an expensive commitment of
time and money, it becomes possible to review and if necessary redirect or even stop something
which is going off the rails. For the solo entrepreneur it is in this stage that judgement is needed
– and sometimes the courage to know when to stop and move on, to let go and start again on
something else. Eventually, the project is launched into some kind of marketplace: externally,
people who might use the product or service or, internally, people who make the choice about
whether to buy into the new process being presented to them. Either way, we don’t have a
guarantee that just because the innovation works and we think it the best thing since sliced bread
they will feel the same way. Innovations diffuse across user populations over time. Usually, the
process follows some kind of S-curve shape. A few brave souls take on the new idea and then
gradually, assuming it works for them, others get on the bandwagon until finally there are just a
few diehards (laggards) who resist the temptation to change. Managing this stage well means we
need to think ahead about how people are likely to react and build these insights into our project
before we reach the launch stage – or else work hard at persuading them after we have launched
it!

Capture Value

Despite all our efforts in recognizing opportunities, finding resources and developing the
venture, there is no guarantee we will be able to capture the value from all our hard work. We
also need to think about, and manage, the process to maximize our chances – through protecting
our intellectual property and the financial returns if we are engaged in commercial innovation or
in scaling and spreading our ideas for social change so that they are sustainable and really do
make a difference. We also have an opportunity at the end of an innovation project to look back
and reflect on what we have learnt and how that knowledge could help us do things better next
time. In other words, we could capture valuable learning about how to build our innovation
capability.

The Context of Success It’s all very well putting a basic process for turning ideas into reality in
place. But it doesn’t take place in a vacuum. It is subject to a range of internal and external
influences that shape what is possible and what actually emerges. This process doesn’t take place
in a vacuum; it is shaped and influenced by a variety of factors. In particular, innovation needs: •
Clear strategic leadership and direction, plus the commitment of resources to make this happen.
Innovation is about taking risks, about going into new and sometimes completely unexplored
spaces. We don’t want to gamble, simply changing things for their own sake or because the
fancy takes us. No organization has resources to waste in that scattergun fashion: innovation
needs a strategy. But, equally, we need to have a degree of courage and leadership, steering the
organization away from what everyone else is doing or what we’ve always done and towards
new spaces. In the case of the individual entrepreneur this challenge translates to one in which a
clear personal vision can be shared in ways which engage and motivate others to buy into it and
to contribute their time, energy, money, etc. to help make it happen. Without a compelling
vision, it is unlikely the venture will get off the ground. • An innovative organization in which
the structure and climate enables people to deploy their creativity and share their knowledge to
bring about change. It’s easy to find prescriptions for innovative organizations which highlight
the need to eliminate stifling bureaucracy, unhelpful structures, brick walls blocking
communication and other factors stopping good ideas getting through. But we must be careful
not to fall into the chaos trap. Not all innovation works in organic, loose, informal environments
or ‘skunk works’; indeed, these types of organization can sometimes act against the interests of
successful innovation. We need to determine appropriate organization that is the most suitable
organization given the operating contingencies. Too little order and structure may be as bad as
too much. This is one area where start-ups often have a major advantage – by definition they are
small organizations (often one-person ventures) with a high degree of communication and
cohesion. They are bound together by a shared vision and they have high levels of cooperation
and trust, giving them enormous flexibility. But the downside of being small is a lack of
resources, and so successful start-ups are very often those which can build a network around
them through which they can tap into the key resources they need. Building and managing such
networks is a key factor in creating an extended form of organization. • Proactive links across
boundaries inside the organization and to the many external agencies that can play a part in the
innovation process: suppliers, customers, sources of finance, skilled resources and of knowledge,
etc. Twenty-first-century innovation is most certainly not a solo act but a multiplayer game
across boundaries inside the organization and to the many external agencies that can play a part
in the innovation process. These days it’s about a global game and one where connections and
the ability to find, form and deploy creative relationships is of the essence. Once again, this idea
of successful lone entrepreneurs and small-scale start-ups as network builders is critical. It’s not
necessary to know or have everything to hand but to know where and how to get it.

1.9. Innovation Risk

While innovation typically adds value to an organization, it is not without risk. Key
innovation risks include:

 Operational

Operational risks include failure to meet specification, costs or launch date. Damage
to company reputation and brand is another potential operational risk.
 Commercial

Consumer resistance and competition are examples of commercial risk.

 Financial

Investment yield may be less than planned. There is also a risk that debt/equity investors become
dissatisfied.
The final stage of the innovation cycle is commercialisation, where the innovation is
marketed and sold to the customer. The innovation now moves out of the
organisation’s control and into the hands of the users. This is the hardest stage of the
innovation cycle for organisations to ‘manage’. It is crucial that the organisation
monitors the innovation’s performance so that any shortcomings are corrected.
Innovative organisations will typically be working on new innovations that will
eventually replace older ones. This is important as product life cycles show reduced
growth for older products and services. Growth may even begin to decline
eventually, therefore impacting an organisation’s ability to expand.
New incremental innovations or changes to the product allow growth to continue. Companies
typically generate far more technical innovations than they can possibly hope to bring to market
effectively. There is a need for structured management and processes to handle innovation from
the ideas stage to commercialisation.