CHAPTER ONE

1. THE INNOVATION IMPERATIVE

1.1 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.

Everybody’s talking about it and This isn’t just propaganda or advertising babble. Innovation
does make 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 which 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 two years away from extinction. Or, as Andy Grove, one
of the founders of Intel, pointed out, ‘Only the paranoid survive!’)

On the plus side innovation is also strongly associated with growth. New business is created by
new ideas, by the process of creating competitive advantage in what a firm can offer. Economists
have argued for decades over the exact nature of the relationship but they are generally agreed
that innovation accounts for a sizeable proportion of economic growth. William Baumol points
out that ‘virtually all of the economic growth that has occurred since the eighteenth century is
ultimately attributable to innovation.’

Survival and growth pose a problem for established players but a huge opportunity form
newcomers to rewrite the rules of the game. One person’s problem is another’s opportunity and
the nature of innovation is that it is fundamentally about entrepreneurship. The skill to spot
opportunities and create new ways to exploit them is at the heart of the innovation process.
Entrepreneurs are risk-takers, but they calculate the costs of taking a bright idea forward against

1
the potential gains if they succeed in doing something different – especially if that involves
upstaging the players already in the game. Of course, not all games are about win/lose outcomes.
Public services like healthcare, education and social security may not generate profits but they do
affect the quality of life for millions of people.

Innovation is about Identifying or creating opportunities: Innovation is driven by the ability

to see connections, to spot opportunities and to take advantage of them. Sometimes this is about
completely new possibilities, for example by exploiting radical breakthroughs in technology.
New drugs based on genetic manipulation have opened a major new front in the war against
disease. Mobile phones, tablets and other devices have revolutionized where and when we
communicate.

Innovation is about New ways of serving existing markets: Innovation isn’t just only about
opening up new markets; it can also offer new ways of serving established and mature ones.
Low-cost airlines are still about transportation, but the innovations firms like Southwest Airlines,
easyJet and Ryanair have introduced have revolutionized air travel and grown the market in the
process.

Innovation is about Growing new markets: Equally important is the ability to spot where and
how new markets can be created and grown. Alexander Bell’s invention of the telephone didn’t
lead to an overnight revolution in communications – that depended on developing the market for
person-to-person communications.

1.2 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, judgement 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. 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.

2
In the rest of the course, we use this lens to look at managing innovation and entrepreneurship.
We’ll use three core concepts:

 Innovation: As a process which can be organized and managed, whether in a start-up

venture or in renewing a 100-year-old business
 Entrepreneurship: As the motive power to drive this process through the efforts of
passionate individuals, engaged teams and focused networks
 Creating value: As the purpose for innovation, whether expressed in financial terms,
employment or growth, sustainability or improvement of social welfare.

Stage in
lifecycle of an
organization
Start-up Growth Sustain/scale Renew
Creating Individual Growing the Building a portfolio Returning to the
commercial entrepreneur business through of incremental and radical frame
value exploiting new adding new radical innovation to breaking kind of
technology or products/ sustain the business innovation which
market opportunity services or and/ or spread its began the business
moving into new influence into new and enables it to
markets markets move forward as
something very
different

1.3 Innovation Isn’t Easy!

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 determination 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.

3
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.

1.4 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.

Any organization can get lucky once but sustaining it for a century or more suggests there’s a bit
more to it than that. 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).

4
1.5. Dimensions of Innovation: What Can We Change?
One approach to finding an answer to the question of where we could innovate is to use a kind of
‘innovation compass’ exploring different possible directions. Innovation can take many forms
but we can map the options along four dimensions:

i. Product:

Changes in the things (products/services) an organization offers. 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

ii. Process:

Changes in the ways these offerings are created and delivered. 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.

Sometimes the dividing line is somewhat blurred. For example, a new jet-powered sea ferry is
both a product and a process innovation. Services represent a particular case of this where the
product and process aspects often merge. For example, is a new holiday package a product or
process change?

iii. Position:

Changes in the context into which the products/services are introduced. Sometimes opportunities
for innovation emerge when we reframe the way we look at something. Henry Ford
fundamentally changed the face of transportation not because he invented the motor car (he was
a comparative latecomer to the new industry) or because he developed the manufacturing process
to put one together (as a craft-based specialist industry car-making had been established for
around 20 years). His contribution was to change the underlying model from one which offered a
hand-made specialist product to a few wealthy customers to one which offered a car for
Everyman at a price he could afford. The ensuing shift from craft to mass production was

5
nothing short of a revolution in the way cars (and later countless other products and services)
were created and delivered.

iv. Paradigm:

Changes in the underlying mental models which frame what the organization does. The term
‘business model’ is increasingly used and this is another way of thinking about ‘paradigm
innovation’. So, business model innovations like ownership to rental, and offline to online.
Paradigm innovation can be triggered by many different things: new technologies, the emergence
of new markets with different value expectations, new legal rules of the game, new
environmental conditions (climate change, energy crises), etc. For example, the emergence of
Internet technologies made possible a complete reframing of how we carry out many businesses.
In the past, similar revolutions in thinking were triggered by technologies like steam power,
electricity, mass transportation (via railways and, with motor cars, roads) and microelectronics.

From Incremental to Radical Innovation…

Another thing to think about is the degree of novelty involved. Clearly, updating the styling on
our car is not the same as coming up with a completely new concept car which has an electric
engine and is made of new composite materials as opposed to steel and glass. There are degrees
of novelty in these, running from minor, incremental improvements right through to radical
changes, which transform the way we think about and use them. Sometimes these changes are
common to a particular sector or activity, but sometimes they are so radical and far-reaching that
they change the basis of society, for example the role played by steam power in the Industrial
Revolution or the ubiquitous changes resulting from today’s communications and computing
technologies.

…to Components and Systems

We can change things at the level of components or we can change a whole system. For
example, we can put a faster transistor on a microchip on a circuit board for the graphics display
in a computer. Or we can change the way several boards are put together into the computer to
give it particular capabilities – a games box, an e-book, a media PC. Or we can link the
computers into a network to drive a small business or office. Or we can link the networks to
others into the Internet. There’s scope for innovation at each level – but changes in the higher-

6
level systems often have implications for lower down. For example, if cars, as a complex
assembly, were suddenly designed to be made out of plastic instead of metal, it would still leave
scope for car assemblers but would pose some sleepless nights for producers of metal
components!
Figure 1.1 illustrates the range of choices, highlighting the point that such change can happen at

the component or sub-system level or across the whole system.

1.6 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.
i. 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.

7
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.

The message here is clear: if we are going to pick up these trigger signals then we need to
develop some pretty extensive antennae for searching and scanning around us – and that includes
some capability for looking into the future.

ii. 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
is often the case with the lone entrepreneur at start-up, how will we find and mobilize them?

iii. 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

8
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.

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!

iv. 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

9
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.

10
  Proactive links across boundaries inside the organization and to the many external
agencies who 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 who 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.
Figure below shows the resulting model: what we need to pay attention to if we are going
to manage innovation well.

1.7 How Can We Make Change Happen?

What are the actions involved in innovation and how can we use this understanding to help us
manage the process better? What comes into our minds when we think of innovation taking
place?

Perhaps the godfather of them all in terms of turning ideas into reality was Thomas
Edison, who during his life registered over 1000 patents. Products for which his

11
 organization was responsible include the light bulb, 35mm cinema film and even the
electric chair. Many of the inventions for which he is famous weren’t in fact invented by
him – the electric light bulb, for example – but were developed and polished technically
and their markets opened up by Edison and his team. More than anyone else Edison
understood that invention is not enough – simply having a good idea is not going to lead
to its widespread adoption and use.

One of the problems we have in managing anything is that how we think about it shapes what we
do about it. So, if we have a simplistic model of how innovation works, for example that it’s just
about invention, that’s what we will organize and manage. We may end up with the best
invention department in the world, but there is no guarantee that people will ever actually want
any of our wonderful inventions! If we are serious about managing innovation, we need to check
on our mental models and make sure we’re working with as complete a picture as possible.

1.7.1. Configuring the Innovation Process: Building Capability

Whatever their size or sector, all organizations are trying to find ways of managing this process
of growth and renewal. There is no right answer: every organization needs to aim for the most
appropriate solution for its particular circumstances. They develop their own particular ways of
doing things and some work better than others. Any organization can get lucky once but the real
skill in innovation management is being able to repeat the trick. And while there are no
guarantees, there is plenty of evidence to suggest that firms can and do learn to manage the
process for success, by consciously building and developing their innovation capability.

These issues apply across the board, though solutions to them may take us in different directions
depending on where we start from. A start-up business may not need much in the way of a formal
and structured process for organizing and managing innovation. a large firm may have extensive
resources to build a global set of networks to support its activities, whereas a start-up may be
vulnerable to threats from elements in its environment it simply didn’t know about, never mind
being connected to.

Allowing for the fact that we will organize and manage in different ways depending on different
kinds of organizations, it is still possible to identify some generic recipes or conditions that help
the innovation process to happen effectively. As we mentioned earlier, there has been plenty of
research around this question. But one of the most important points to make at the outset is that
12
organizations and individuals aren’t born with the capability to organize and manage this
process: they learn and develop it over time, and mainly through a process of trial and error.
They hang on to what works and develop their capabilities in that – and they try to drop those
things which don’t work.

For example, successful innovation correlates strongly with how a firm selects and manages
projects, how it coordinates the inputs of different functions, how it links up with its customers,
etc. Successful innovators acquire and accumulate technical resources and managerial
capabilities over time; there are plenty of opportunities for learning – through doing, using,
working with other firms, asking the customers, etc. – but they all depend upon the readiness of
the organization to see innovation less as a lottery than as a process which can be continuously
improved.

Another critical point to emerge from research is that innovation needs managing in an
integrated way; it is not enough just to be good at one thing. It’s less like running a 100-metre
sprint than developing the range of skills to compete effectively in a range of events in the
pentathlon.

1.8 What, Why and When: The Challenge of Innovation Strategy

Building a capability to organize and manage innovation is a great achievement, but unless that
capability is pointed in a suitable direction the organization risks being all dressed up with
nowhere to go! And for entrepreneurs starting a new venture the challenge is even greater:
without a clear sense of direction, a vision you can share with others to excite and focus them,
the whole thing may never take off. So, the last theme we need to consider is where and how
innovation can be used to strategic advantage.

Strategic advantages through innovation:

Mechanism Strategic advantage

in product or service offering Offering something no one else can
Novelty in process Offering it in ways others cannot match –
faster, cheaper, more customized, etc.
Complexity Offering something others find difficult to
master

13
 Legal protection of intellectual property Offering something others cannot do unless
they pay a license or other fee

Add/extend range of competitive factors Move basis of competition (e.g. from price of
product to price and quality, or price, quality,
choice)
Timing First-mover advantage (being first can be
worth significant market share in new product
fields) Fast-follower advantage (sometimes
being first means you encounter many
unexpected teething problems, and it makes
better sense to watch someone else make the
early mistakes and move fast into a follow-up
product)
Robust/platform design Offering something which provides the
platform on which other variations and
generations can be built.

Rewriting the rules Offering something which represents a

completely new product or process concept –
a different way of doing things – and makes
the old ones redundant.
Others Innovation is all about finding new ways to
do things and to obtain strategic advantage –
so there will be room for new ways of gaining
and retaining advantage.

The problem isn’t the shortage of ways of gaining competitive advantage through innovation but
rather which ones to choose and why. It’s a decision all organizations have to take, be it a start-
up deciding the (relatively) simple question of go/no go in terms of trying to enter a hostile
marketplace with its new idea or a giant firm trying to open up new market space through
innovation.

1.8.1. Creating an Innovation Strategy

Putting an innovation strategy together involves three key steps, pulling together ideas around
core themes and inviting discussion and argument to sharpen and shape them. These are:

 Strategic analysis: what could we do?

 Strategic selection: what are we going to do, and why?

14
  Strategic implementation: how are we going to make it happen?
i. Strategic Analysis

Strategic analysis begins with exploration of innovation space: where could we innovate and
why would it be worth doing so? A useful place to start is to build some sense of the overall
environment, to explore the current threats and opportunities and the likely changes to these in
the future. Typically, questions here relate to technologies, to markets, to underlying political
trends, to emerging customer needs, to competitors and to social and economic forces. It’s also
useful to add to this map some sense of who the players are in the environment: the particular
customers and markets, the key suppliers and the number and type of competitors.

Within this framework it’s also important to reflect on what resources the organization can bring
to bear. What are its relative strengths and weaknesses and how may it build and sustain a
competitive advantage?

Tools to help with this mapping exercise, such as PEST analysis, Rich pictures, SWOT and Five
forces strategic analysis. (It’s important to remember that these are tools to help start a discussion
– not accurate measuring devices. There are real limitations to how much we can know about an
environment which is complex, interactive and constantly changing, and there are often wide
differences about where the strengths and weaknesses actually lie.)

Having explored this environment, we need to understand the range of possibilities. Where can
we
innovate to advantage? What kinds of opportunities exist for use to create something different
and capture value from bringing those ideas into the world? We can think about strategy as a
process of exploring the space defined by our four innovation types – the 4Ps mentioned earlier.
Each of our 4Ps of innovation can take place along an axis running from incremental through to
radical change.

ii. Strategic Selection

The issue here is choosing out of all the things we could do which ones we will do – and why?
We have scarce resources so we need to place our bets carefully, balancing the risks and rewards
across a portfolio of projects. There are plenty of tools to help us do this, from simple financial

15
measures like payback time or return on investment through to complex frameworks which
compare projects across many dimensions.

The challenge is for individuals and organizations to be aware of the extensive space within
which innovation possibilities exist and to try to develop a strategic portfolio which covers this
territory effectively, balancing risks and resources. So how can we choose which options will
make sense for us? It’s helpful to consider two complementary themes in answering this
question:

 What is our overall business strategy (where we are trying to go as an organization) and
how will innovation help us get there?
 Do we know anything about the direction we want to go in – does it build on something
we have some competence in (or have access to)?
iii. Strategic Implementation

Having explored what we could do and decided what we are going to do, the third stage in
innovation strategy development is to plan for implementation. Thinking through what we are
going to need and how we will get these resources, who we may need to partner with, what likely
roadblocks may we find on the way – all of these questions feed into this step.

Of course, it isn’t a simple linear process. In practice, there will be plenty of discussion of these
issues as we explore options and argue for particular choices, But that’s the essence of strategy: a
conversation and a rehearsal, imagining and thinking forward about uncertain activities into the
future.

To help do this we have a number of tools, again ranging from the simple to the complex. We
could, for example, make a simple project plan which sets out the sequence of activities we need
to carry out to make our innovation come alive. That would help us identify which resources we
need and when and could also highlight some of the potential trouble spots so we could think
through how we would deal with them. Many tools add a dimension of ‘What if?’ planning to
such project models – trying to anticipate key difficulties and take a worst-case view so suitable
contingency plans can be made.

16