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Chapter 10
Entrepreneurship
and innovation

Learning outcomes

• Anticipate key issues facing entrepreneurs in opportunity recognition, in making choices

during the entrepreneurial process and in various stages of growth, from start-up to exit.
• Evaluate opportunities and choices facing social entrepreneurs as they create new ventures
to address social problems.
• Identify and respond to key innovation dilemmas, such as the relative emphases to place
on technologies or markets, product or process innovations and open versus closed
innovation.
• Anticipate and to some extent influence the diffusion (or spread) of innovations.
• Decide when being a first-mover or an imitator and follower is most appropriate in
innovation, and how an incumbent organisation should respond to innovative challengers.

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Entrepreneurship and innovation: four major

themes

Strategic
entrepreneurship
Strategic entrepreneurship combines strategy
and entrepreneurship and includes both
advantage-seeking strategy activities and
opportunity-seeking entrepreneurial activities to
create value.
• Strategy supports this by forming competitive
advantages.
• Entrepreneurship contributes the
identification of new opportunities in the
market or environment.
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Strategic
entrepreneurship
Strategic entrepreneurship combines strategy
and entrepreneurship and includes both
advantage-seeking strategy activities and
opportunity-seeking entrepreneurial activities to
create value.
• Strategy supports this by forming competitive
advantages.
• Entrepreneurship contributes the
identification of new opportunities in the
market or environment.
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Entrepreneurship

• Entrepreneurship is a process by which

individuals, teams, or organisations identify
and exploit opportunities for new products or
services that satisfy a need in a market.
• Opportunity recognition: recognising an
opportunity (i.e. circumstances under which
products and services can satisfy a need in the
market or environment) is central for any form
of entrepreneurship.

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Entrepreneurial opportunity recognition

https://www.youtube.com/watch?v=l2ce7OjrBX4
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Steps in the entrepreneurial

process

Steps in the
entrepreneurial
process

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Entrepreneurial life cycle

The entrepreneurial life cycle progresses
through four stages each with key
challenges:
• Start-up – sources of capital;
• Growth – transition to management;
• Maturity – retaining commitment and
generating new growth;
• Exit – alternative ways of releasing
capital.
https://www.youtube.com/watch?v=g1jIMjCHMyo
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Stages of entrepreneurial growth

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Entrepreneurial strategies
Two key characteristics of entrepreneurial businesses have an impact
on strategy:

• Resource scarcity – in terms of finance and managerial capacity

• Relative invisibility – small businesses are less likely to prompt a
competitive response from incumbents.
The impact depends on whether the market is new (speed of
response is key) or mature (finding a niche is key).

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Innovation
Innovation involves the conversion of new knowledge
into a new product, process or service and the putting
of this new product, process or service into actual
commercial use.

Innovation is more complex than invention (i.e. the

conversion of new knowledge into a new product,
process or service) – putting the invention into use can
be the most challenging part of the process.
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Innovation dilemmas
1. Technology push or market pull

Technology push is the view that it is the new knowledge

created by technologists or scientists that pushes the
innovation process (i.e. the outcomes from R&D labs).

Market pull is the view that it is the pull of users in the

market that is responsible for innovation. ‘Lead users’ are
of particular importance. In contrast, ‘frugal innovation’ is
also important – sensitivity to the real needs of poorer
consumers (e.g. Tata’s Nano car).
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Tech push or market pull?

https://www.youtube.com/watch?v=tnMafm8ih0w
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Innovation dilemmas
2. Product or process innovation
• Product innovation relates to the final product (or
service) to be sold, especially with regard to its
features.
• Process innovation relates to the way in which a
product is produced and distributed, especially with
regard to improvements in cost or reliability.

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Product and process innovation

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New developing industries favour product

innovations.

Maturing industries favour process

Implications of innovations.
product/process
innovation Small new entrants have greatest opportunities
in the early stages of an industry.
model
Large incumbent firms have advantages in later
stages.

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Innovation dilemmas
3. Open or closed innovation
• ‘Closed’ innovation – the traditional approach to innovation, relying on the
organisation’s own internal resources – its own laboratories and marketing
departments. Innovation is secretive, organisations are anxious to protect
intellectual property and avoid competitors free-riding on their ideas.

• ‘Open’ innovation involves the deliberate import and export of knowledge by an

organisation in order to accelerate and enhance its innovation. Exchanging ideas
openly is seen as likely to produce better products more quickly.

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https://www.youtube.com/watch?v=2ukqne5OE3o

https://www.forbes.com/sites/enriquedans/2019/04/04/heres-the-problem-
with-googles-innovation-strategy
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Open innovation
Open innovation is now being widely adopted.
For example:
• ‘Collaboratories’ – IBM has established 10 worldwide joint
development ventures with other companies and universities.
• Crowdsourcing – an organisation broadcasts a specific problem
to a crowd of individuals or teams often in tournaments with
prizes awarded to the best solution.

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Open or closed innovation

The balance between open and closed innovation depends on:
• Competitive rivalry – if it is intense closed innovation is better.

• ‘One-shot’ or continuous innovation – open innovation is best where

innovation is continuous (encouraging reciprocal behaviour).

• Complex and tight-linked innovation – closed innovation is best in

order to avoid inconsistent elements in development.

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Platform leadership
Platform leadership refers to how large firms consciously
nurture independent companies through successive waves
of innovation around their basic technological ‘platform’.
Examples include: Microsoft and Sony (in the video games
market) and Intel (in the computer industry).

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Innovation diffusion
Diffusion is the process by which
innovations spread amongst users. This
can vary with respect to both speed
and extent.

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Degree of improvement – more improvement

encourages change and faster diffusion.

Compatibility – the more compatible products

there are, the faster is the diffusion.
Supply side Complexity – over complex product or marketing
determinants slows down diffusion.
of diffusion Experimentation – ability to test products before
purchase (e.g. free trials) encourages diffusion.

Relationship management – ease of getting

information and support increases diffusion.

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Market awareness – better promotion

(especially ‘push’ campaigns) speeds up
diffusion.

Demand side Network effects – diffusion increases as

more people adopting the innovation makes
determinants it more desirable (e.g. Facebook).
of diffusion
Customer propensity to adopt – targeting to
the early adopters (often younger and
wealthier consumers) speeds up diffusion by
creating a bandwagon effect.
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The
diffusion
S-curve

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• The tipping point is where demand for

a product or service suddenly takes off,
with explosive growth.

The S-curve • The tripping point is the opposite of

the tipping point, when demand
collapses – sometimes drastically but
often more gradually.

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• The S-curve reflects a process of initial slow

adoption of innovation, followed by a rapid
acceleration in diffusion leading to a plateau
representing the limit to demand.

The S-curve • Decision points are:

• Timing of the tipping point
• Extent of diffusion
• Timing of the plateau
• Timing of the
• ‘tripping point’

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Innovators and imitators

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Innovators and imitators

• First-mover advantage exists where an organisation is better off than
its competitors as a result of being first to market with a new product,
process or service.
• In theory, this creates an initial monopoly position but there are also
some disadvantages.
• Examples of first mover advantage include Coca-Cola (in soft drinks)
and Hoover (in vacuum cleaners).

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Innovators and imitators

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Reputation

Scale benefits
First-mover Experience curve benefits
advantages
Pre-emption of scarce resources

Buyer switching costs

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Free-riding – imitating
pioneer’s strategies
Late-mover but more cheaply
advantages Learning – from the
mistakes made by
pioneers
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A fast The most appropriate response to

innovation, especially radical
second? innovation, is often not to be a first-
mover, but to be a ‘fast second’– being
one of the first to imitate the original
innovator.
Fast second companies may not literally
be the second company into the
market, but they dominate the second
generation of competitors (e.g. Amazon
Kindle).

https://www.youtube.com/watch?v=K6Efl5f8wf4
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First or second?
Three contextual factors in choosing between innovating and imitating:
• Capacity for profit capture – a problem if an innovation is easy to
replicate and if intellectual property rights are weak e.g. where
patents are hard to define or defend.
• Complementary assets – does the organisation have the resources
to ‘scale up’ the innovation?
• Fast-moving arenas – the innovator is unlikely to achieve a durable
advantage.

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Diruptive innovation

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Disruptive innovation
•Disruptive innovation
creates substantial growth by
offering a new performance
trajectory that, even if initially
inferior to the performance of
existing technologies, has the
potential to become markedly
superior.

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Disruptive innovation

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Disruptive innovation
Incumbents can follow one (or more) of three policies to help keep
them responsive to potentially disruptive innovations:

• Develop a portfolio of real options – (limited investments that keep

opportunities open for the future).
• Corporate venturing – small, innovative businesses with relative
autonomy.
• ‘Intrapreneurship’ – the ability of individuals to perform
entrepreneurial activities within a large organisation.

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Summary
• Opportunity recognition involves three important and interdependent elements: the environment, the
entrepreneur or entrepreneurial team and resources and capabilities.
• Besides opportunity recognition, the entrepreneurship process typically involves the development of a
business plan, making a feasibility analysis, considering industry conditions and competitors, choosing
business model and strategy and, finally, examining the venture’s financing and funding.
• Social entrepreneurship offers a flexible way of addressing social problems, but raises issues about
appropriate missions, organisational forms and business models.
• Strategists face three fundamental dilemmas in innovation: the relative emphasis to put on
technology push or market pull; whether to focus on product or process innovation; and finally how
much to rely on ‘open innovation’.
• Innovations often diffuse into the marketplace according to an S-curve model in which slow start-up is
followed by accelerating growth (the tipping point) and finally a flattening of demand. Managers
should watch out for ‘tripping points’.
• Managers have a choice between being first into the marketplace and entering later. Innovators can
capture first-mover advantages. However, ‘fast second’ strategies are often more attractive.
• Established incumbents’ businesses should beware disruptive innovations. Incumbents can stave off
inertia by developing portfolios of real options, by organising autonomous new venture units or by
encouraging ‘intrapreneurship’.

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