Wednesday, February 13, 2008

Innovation - Looking for Opportunity

The distinction between innovation and invention is rather important. (Joshua Lerner and Marco Iansiti, Evidence Regarding Microsoft and Innovation, AEI-Brookings Joint Center Publication (2002)).

Invention, by itself is not as important as innovation. F. Scott Kieff, argued that society will benefit more from the commercialization of inventions (which turns them into innovations) than by inventions themselves, because of: 1) positive externalities resulting from the diffusion, refinment process, 2) consumer access to new technologies.

Innovation has to be a managerial skill of entrepreneurs. Innovation has to be a managerial skill of all managers.

What is an innovation: Successful innovators take ideas and turn them into opportunities by adding a business model that creates sustainable economic value for all stakeholders. They then go one step further, implement the business model and create a sustainable business.

Innovators have to look for ideas. They have to look at some of the disruptive changes in their industry that might serve as the source of innovation. The areas they can look at are:

Technology: What are the key emerging technologies, and how are they being used inside and outside the industry, company, and region to create proprietary advantage?

Business Models: Are there new business models emerging that one can adopt or adapt to deliver radical improvements in the way business is being done?

Will these improvements drive profitable growth by creating proprietary advantages in the way you do business? Can you expand not just your "share of market" but also your "share of wallet" by adding new business models—for example, if you currently have a product business, can you add information, services, or solutions? Can you expand into adjacent businesses by either taking over activities that used to be done by someone else in your industry, expanding into new markets, or adding new products?

Industry Dynamics: Are there fragmented industries where significant value can be delivered through consolidation? Are there shifts in power (e.g., entry or exit of a key player or consolidation of several players) that threaten your existing position or create opportunities to partner in your existing business or enter a new one?

Globalization: What's happening in another part of the world that you could adopt or adapt in your environment? What are the proprietary advantages that you have based on your access to people, information, materials, or capital? Are new markets or businesses emerging in other parts of the world that create opportunities or threats?

Offshoring and Outsourcing: Are there opportunities to create value by outsourcing or offshoring activities that you currently perform inside your organization? Are there activities that you currently source from outside that you should be doing inside to create proprietary advantage?

Regulatory, Macroeconomic, Political, Societal: Are there impending (or early) shifts in regulation, political power, or society that threaten to disrupt entrenched power bases and provide opportunities for new entrants?

A disruptive change can be viewed from 2 very different perspectives—as an opportunity or as a threat. In fact, entrepreneurs often view disruptive change as a source of opportunity. When they see a disrupted business environment—whether that disruption is from new technologies, new business models, or new regulations—they ask, "How can I leverage these changes to create value?"

Disruptions in the business environment cause economic shifts that destabilize industries, companies, and even countries.But established companies often approach innovation and disruption much differently. Having worked hard to align strategy and organization to support the current business, they develop tunnel vision, encouraging employees, customers, suppliers, and partners to work together to deliver today's business results. Even when disruptive opportunities are identified, tightly aligned organizations, business models, and industry relationships make it tough to respond quickly and effectively. As a result, executives in established firms often frame disruption as a threat. When they see changes happening, they work to defend their existing business model and ask, "How can I insulate against these disruptive threats and preserve my current business model?"

The right way of managing change is to turn disruptive change into a source of ideas.

Jeff Timmons, whose book New Venture Creation has been a bestseller for over a decade, calls good ideas a "tool in the hands of an entrepreneur." Indeed, finding good ideas is the first step in the innovation process. Successful serial entrepreneurs are able to recognize patterns before an opportunity takes shape. They search for ideas at the intersection of markets, industries, and emerging technologies. They look for disruptors that will "unfreeze" a stable industry and the companies that compete within them. They look for business models that worked well in one market and can be adapted and applied in another. They recognize that they must listen to customers but must sometimes introduce and educate the marketplace to new approaches.

Entrepreneurs identify ideas by raising their head above day-to-day operations and expanding their vision. They then prioritize and narrow the many ideas they generate into a potential opportunity that addresses a compelling problem for customers who are able—and willing—to pay. The following guidelines can help to leverage disruption to turn ideas into opportunities to create sustainable business advantage.

Listen to—and learn from—the market: Identify sources of significant problems that cannot be solved using today's product and service offerings. Focus first on the problem—not the solution. Be sure that you don't just listen to your current customers. They have the same tunnel-vision problems that you do and may even actively push to keep you from considering new approaches. Keep in mind Henry Ford's classic comment as he struggled to take advantage of new technologies in the early 1900s: "If I asked people what they wanted," he said, "they would have said, 'Faster horses.'

Expand your horizons: Set aside a portion of every week for broadening your perspective. Identify important global and local trends that signal potential revolutionary shifts in customer behavior. Look for new business models and technologies that can radically transform product, market, and industry economics and power. Benchmark inside and outside your industry, remembering to benchmark the rate of change in value delivered—not just a single point in time. Clarify and challenge the biases and business models in your firm and in your industry.
Identify potential disruptors that could be a source of opportunity: Identify people with a broad range of perspectives on potential disruptive opportunities. Working individually, analyze the disruptive trends within the key categories discussed earlier.

Select ideas for further evaluation: Now bring the individuals together. Working as a team, have each person share his or her analysis of disruptors. Discuss what you have learned from the analysis and brainstorm business ideas that leverage disruptors to create value for you and for your customers, partners, and other stakeholders. Identify the potential value of promising ideas and a process for prioritizing and choosing among them. Do a "back-of-the-envelope" assessment of each idea.

Turn promising ideas into opportunities: Identify a promising opportunity and develop a business plan that highlights both long-term and short-term ("go-to-market") opportunity. Define product-market positioning at entry and the capabilities and resources required. Define a plan for evolving strategy and capabilities to exploit long-term value potential.

Implement to reduce risk and manage uncertainty:
Successful entrepreneurs are not risk seekers. Instead, they have learned to manage risk by identifying key assumptions and uncertainties in their business plan and then staging commitments and implementation to reduce uncertainty while building a sustainable business. Established firms must adopt a similar approach to risk management when venturing into uncharted territories. You can't simply use the same approach that you use to incrementally evolve a mature business. Some firms create separate new venture groups responsible for leading radical business innovation and disruptive change. Others maintain a closer connection to established business groups to facilitate future integration of new businesses into the established business. We've seen examples of success using both approaches. The key is to become skilled at the entrepreneurial innovation process as you search for ideas in the face of disruption, turn ideas into opportunities, choose opportunities to pursue, successfully launch new businesses, and grow and evolve them to create sustainable proprietary advantage.

Jumpstarting Innovation:
Using Disruption to Your Advantage
Published: September 4, 2007
Author: Lynda M. Applegate

Jeff Timmon's Book

New Venture Creation

Jeffrey A. Timmons · Stephen Spinelli
McGraw-Hill/Irwin, 700 pages

Description: [From McGraw-Hill] Timmons & Spinelli's, New Venture Creation: Entrepreneurship For The 21st Century, 6/e is a perforated paperback text that covers the process of getting a new venture started, growing the venture, successfully harvesting it and starting again. Through text, case studies, and hands-on exercises, the book guides students in discovering the concepts of entrepreneurship and the competencies, skills, know-how and experience that are sufficient to pursue different entrepreneurial opportunities. The authors recognize that there is no substitute for actually starting a company, but believe that it is possible to expose students to many of the vital issues and immerse them in key learning experiences.

Interview with Timmons, 2004

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