ENTREPRENEURSHIP AND INNOVATION TOOLKIT, 3rd Edition LEE A. SWANSON Saskatoon, Saskatchewan 1 Copyright:2017 by Lee A. Swanson. Version 3.0 CC BY-SA 2017 by Lee Swanson Entrepreneurship and Innovation Toolkit by Lee A. Swanson is licensed under a Creative Commons AttributionShareAlike 4.0 International License, except where otherwise noted. 2 TABLE OF CONTENTS ACKNOWLEDGEMENTS 5 INTRODUCTION 6 CHAPTER 1 – INTRODUCTION TO ENTREPRENEURSHIP 7 Learning Objectives 7 Overview 7 Considerations Influencing Definitions of Entrepreneur and Entrepreneurship 7 Examples of Definitions of Entrepreneur 9 Examples of Definitions of Entrepreneurship 9 The Evolution of Entrepreneurship Thought 10 Basic Questions in Entrepreneurship Research 13 Studying Entrepreneurship 17 The Language of Entrepreneurship 18 CHAPTER 2 – OPPORTUNITY RECOGNITION AND DESIGN THINKING 20 Learning Objectives 20 Overview 20 Opportunity Recognition 20 Design Thinking 26 CHAPTER 9 – INNOVATION AND ENTREPRENEURSHIP 27 Overview 27 Innovation and Entrepreneurship 27 Competencies and Core Competence 27 Elements of Innovation 28 REFERENCES 3 32 Entrepreneurship and Innovation Toolkit Lee A. Swanson 3rd Edition Publication Date 2017 4 Acknowledgements I am thankful for the feedback provided by my students over the past many years as they used previous versions of this book. Its current form reflects their suggestions and advice. Thanks also to Grant Wilson for his help in converting this book from its print form into this open access format. 5 Introduction The business world is often equated to an ecosystem, such that the environment is comprised of interacting organizations and individuals much like the biological ecosystem (Moore, 1993). Entrepreneurship is no different, as it can be thought of as its own ecosystem, with new ventures being created, some maturing, others needing to adapt, or some becoming extinct. Much like the biological ecosystem, in the entrepreneurial ecosystem change occurs and gives rise to opportunity or presents challenges. It is important to consider the various levels of the ecosystem when evaluating the entrepreneurial environment. For example, the ecosystems can be analyzed at a macro level such as the terrestrial ecosystem in biology or the national economy in entrepreneurship. Additionally, ecosystems can be analyzed at more micro levels like the rain forest ecosystem in biology or the firm level in entrepreneurship. Whilst there is no universal readily accepted definition of the concept of entrepreneurship, it is fair to say that it is multi–dimensional. It involves analyzing people and their actions together with the ways in which they interact with their environments, be these social, economic or political, as well as the institutional, policy and legal frameworks which help define and legitimize human activities (Blackburn, 2011, p. xiii). Entrepreneurship involves such a range of activities and levels of analysis that no single definition is definitive (Lichtenstein, 2011, p. 472). Entrepreneurship is complex, chaotic, and lacks any notion of linearity. As educators, we have the responsibility to develop the discovery, reasoning, and implementation skills of our students so they may excel in highly uncertain environments (Neck & Greene, 2011, p. 55). 6 Chapter 1 – Introduction to Entrepreneurship Whilst there is no universally readily accepted definition of the concept of entrepreneurship, it is fair to say that it is multi-dimensional. It involves analyzing people and their actions together with the ways in which they interact with their environments, be these social, economic or political, as well as the institutional, policy and legal frameworks which help define and legitimize human activities (Blackburn, 2011, p.xiii). Entrepreneurship involves such a range of activities and levels of analysis that no single definition is definitive (Lichtenstein, 2011, p. 472). Entrepreneurship is complex, chaotic, and lacks any notion of linearity. As educators, we have the responsibility to develop the discovery, reasoning, and implementation skills of our students so they may excel in highly uncertain environments (Neck & Greene, 2011, p. 55). Learning Objectives After completing this chapter you will be able to: • • • • • • Examine the challenges associated with defining the concepts of entrepreneur and entrepreneurship. Discuss how the evolution of entrepreneurship thought has influenced how we view the concept of entrepreneurship today. Discuss how the list of basic questions in entrepreneurship research can be expanded to include research inquiries that are important in today’s world. Discuss how the concepts of entrepreneurial uniqueness, entrepreneurial personality traits, and entrepreneurial cognitions can help society improve its support for entrepreneurship. Apply the general venturing script to the study of entrepreneurship. Apply the language of entrepreneurship. Overview This chapter provides you with an overview of entrepreneurship and of the language of entrepreneurship. The challenges associated with defining entrepreneur and entrepreneurship are explored as is an overview of how entrepreneurship can be studied. The objective is to enable you to apply current concepts in entrepreneurship to the evaluation of entrepreneurs, their ventures, and the venturing environment. You will develop skills, including the capability to add value in the new venture sector of the economy. You will acquire and practice evaluation skills useful in consulting, advising, and in making new venture decisions. Considerations Influencing Definitions of Entrepreneur and Entrepreneurship It is necessary to be able to determine exactly who entrepreneurs are before we can, among other things, study them, count them, provide special loans for them, and calculate how and how much they contribute to our economy. • • • Does someone need to start a business from scratch to be called an entrepreneur? Can we call someone an entrepreneur if they bought an ongoing business from someone else or took over the operations of a family business from their parents? If someone starts a small business and never needs to hire employees, can they be called an entrepreneur? If someone buys a business but hires professional managers to run it so they don’t have to be involved in the operations, are they an entrepreneur? Is someone an entrepreneur if they buy into a franchise so they can follow a well-established formula for • • Is someone an entrepreneur because of what they do, or because of how they think? Can someone be an entrepreneur without owning their own business? • • 7 running the operation? • Can a person be an entrepreneur because of the nature of the work that they do within a large corporation? It is also necessary to fully understand what we mean by entrepreneurship before we can study the concept. Gartner (1990) identified 90 attributes that showed up in definitions of entrepreneurs and entrepreneurship provided by entrepreneurs and other experts in the field. The following are a few of these attributes: • • • • • • • Innovation – Does a person need to be innovative or not to be considered an entrepreneur? Can an activity be considered to be entrepreneurial if it is not innovative? Activities – What activities does a person need to do to be considered an entrepreneur? Creation of a new business – Does someone need to start a new business to be considered to be an entrepreneur, or can someone who buys a business, buys into a franchise, or takes over an existing family business be considered an entrepreneur? Starts an innovative venture within an established organization – Can someone who works within an existing organization that they don’t own be considered an entrepreneur if they start an innovative venture for their organization? Creation of a not-for-profit business – Can a venture be considered to be entrepreneurial if it is a not-for-profit, or should only for-profit businesses be considered entrepreneurial? After identifying the 90 attributes, Gartner (1990) went back to the entrepreneurs and other experts for help in clustering the attributes into themes that would help summarize what people concerned with entrepreneurship thought about the concept. He ended up with the following 8 entrepreneurship themes: 1. The Entrepreneur: The entrepreneur theme is the idea that entrepreneurship involves individuals with unique personality characteristics and abilities…. (e.g., risk taking, locus of control, autonomy, perseverance, commitment, vision, creativity).… Almost 50% of the respondents rated characteristics of the entrepreneur as not important to a definition of entrepreneurship (Gartner, 1990, pp. 21, 24). “The question that needs to be addressed is: Does entrepreneurship involve entrepreneurs (individuals with unique characteristics)” (Gartner, 1990, p. 25)? 2. Innovation The innovation theme is characterized as doing something new as an idea, product, service, market, or technology in a new or established organization…. The innovation theme suggests that innovation is not limited to new ventures, but recognized as something which older and/or larger organizations may undertake as well (Gartner, 1990, p. 25). Some of the experts questioned by Gartner believed that it was important to include innovation in definitions of entrepreneurship, and others did not think it was as important. “Does entrepreneurship involve innovation” (Gartner, 1990, p. 25)? 3. Organization Creation The organization creation theme described the behaviors involved in creating organizations. This theme described acquiring and integrating resource attributes (e.g., Brings resources to bear . . . , Integrates opportunities with resources . . . , Mobilizes resources, gathers resources) as well as attributes that described creating organizations (New venture development and The creation of a business that adds value). (Gartner, 1990, p. 25) “Does entrepreneurship involve resource acquisition and integration (new venture creation activities)” (Gartner, 1990, p. 25)? 4. Creating Value This theme articulated the idea that entrepreneurship creates value. The attributes in this factor indicated that value creation might be represented by transforming a business, creating a new business growing a business, creating wealth, or destroying the status quo. Does entrepreneurship involve creating value (Gartner, 1990, p. 25)? 5. Profit or Nonprofit 8 “Does entrepreneurship involve profit-making organizations only” (Gartner, 1990, p. 25)? 6. Growth Should a focus on growth be a characteristic of entrepreneurship? 7. Uniqueness This theme suggested that entrepreneurship must involve uniqueness. Uniqueness was characterized by attributes such as a special way of thinking, a vision of accomplishment, ability to see situations in terms of unmet needs, and creates a unique combination. Does entrepreneurship involve uniqueness (Gartner, 1990, p. 26)? 8. The Owner-Manager • Some of the respondents questioned by Gartner (1990) did not believe that small mom-and-pop types of businesses should be considered to be entrepreneurial. • Some respondents felt that an important element of a definition of entrepreneurship was that a venture be owner-managed. • To be entrepreneurial, does a venture need to be owner-managed? Examples of Definitions of Entrepreneur An entrepreneur can be described as “one who creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying significant opportunities and assembling the necessary resources to capitalize on them” (Zimmerer & Scarborough, 2008, p. 5). An entrepreneur is “one who organizes, manages, and assumes the risks of a business or enterprise” (Entrepreneur, n.d.). Examples of Definitions of Entrepreneurship Entrepreneurship can be defined as a field of business that does the following: seeks to understand how opportunities to create something new (e.g., new products or services, new markets, new production processes or raw materials, new ways of organizing existing technologies) arise and are discovered or created by specific persons, who then use various means to exploit or develop them, thus producing a wide range of effects (Baron, Shane, & Reuber, 2008, p. 4) A concise definition of entrepreneurship “is that it is the process of pursuing opportunities without limitation by resources currently in hand” (Brooks, 2009, p. 3). “Entrepreneurship is the process of doing something new and something different for the purpose of creating wealth for the individual and adding value to society” (Kao, 1993, p. 70) 9 The Evolution of Entrepreneurship Thought This section includes an overview of how entrepreneurship has evolved to the present day. The following time line shows some of the most influential entrepreneurship scholars and the schools of thought (French, English, American, German, and Austrian) their perspectives helped influence and from which their ideas evolved. Schools of thought are essentially groups of people who might or might not have personally known each other, but who shared common beliefs or philosophies. Figure 1 – Historical and Evolutionary Entrepreneurship Thought The Earliest Entrepreneurship The function, if not the name, of the entrepreneur is probably as old as the institutions of barter and exchange. But only after economic markets became an intrusive element of society did the concept take on pivotal importance. Many economists have recognized the pivotal role of the entrepreneur in a market economy. Yet despite his central importance in economic activity, the entrepreneur has been a shadowy and elusive figure in the history of economic theory (Hebert & Link, 2009, p. 1). Historically those who acted similarly to the ways we associate with modern day entrepreneurs – namely those who strategically assume risks to seek economic (or other) gains – were military leaders, royalty, or merchants. Military leaders planned their campaigns and battles while assuming significant risks, but by doing so they also stood to gain economic benefits if their strategies were successful. Merchants, like Marco Polo who sailed out of Venice in the late 1200s to search for a trade route to the Orient, also assumed substantial risks in the hope of becoming wealthy (Hebert & Link, 2009). The entrepreneur, who was also called adventurer, projector, and undertaker during the eighteenth century, was not always viewed in a positive light (Hebert & Link, 2009). Development of Entrepreneurship as a Concept Risk and Uncertainty Richard Cantillon (1680-1734) was born in France and belonged to the French School of thought although he was an Irish economist. He appears to be the person who introduced the term entrepreneur to the world. “According to Cantillon, the entrepreneur is a specialist in taking on risk, ‘insuring’ workers by buying their output for resale before consumers have indicated how much they are willing to pay for it” (Casson & Godley, 2005p. 26). The workers’ incomes are mostly stable, but the entrepreneur risks loss if market prices fluctuate. 10 Cantillon distinguished entrepreneurs from two other classes of economic agents; landowners, who were financially independent, and hirelings (employees) who did not partake in the decision-making in exchange for relatively stable incomes through employment contracts. He was the first writer to provide a relatively refined meaning for the term entrepreneurship. Cantillon described entrepreneurs as individuals who generated profits through exchanges. In the face of uncertainty, particularly over future prices, they exercise business judgment. They purchase resources at one price and sell their product at a price that is uncertain, with the difference representing their profit (Chell, 2008; Hebert & Link, 2009). Farmers were the most prominent entrepreneurs during Cantillon’s lifetime, and they interacted with “arbitrageurs” – or middlemen between farmers and the end consumers – who also faced uncertain incomes, and who were also, therefore, entrepreneurs. These intermediaries facilitated the movement of products from the farms to the cities where more than half of the farm output was consumed. Cantillon observed that consumers were willing to pay a higher price per unit to be able to purchase products in the smaller quantities they wanted, which created the opportunities for the intermediaries to make profits. Profits were the rewards for assuming the risks arising from uncertain conditions. The markets in which profits were earned were characterized by incomplete information (Chell, 2008; Hebert & Link, 2009). Adolph Reidel (1809-1872), form the German School of thought, picked up on Cantillon’s notion of uncertainty and extended it to theorize that entrepreneurs take on uncertainty so others, namely income earners, do not have to be subject to the same uncertainty. Entrepreneurs provide a service to risk-averse income earners by assuming risk on their behalf. In exchange, entrepreneurs are rewarded when they can foresee the impacts of the uncertainty and sell their products at a price that exceeds their input costs (including the fixed costs of the wages they commit to paying) (Hebert & Link, 2009). Frank Knight (1885-1972) founded the Chicago School of Economics and belonged to the American School of thought. He refined Cantillon’s perspective on entrepreneurs and risk by distinguishing insurable risk as something that is separate from uncertainty, which is not insurable. Some risks can be insurable because they have occurred enough times in the past that the expected loss from such risks can be calculated. Uncertainty, on the other hand, is not subject to probability calculations. According to Knight, entrepreneurs can’t share the risk of loss by insuring themselves against uncertain events, so they bear these kinds of risks themselves, and profit is the reward that entrepreneurs get from assuming uninsurable risks (Casson & Godley, 2005). Distinction Between Entrepreneur and Manager Jean-Baptiste Say (1767-1832), also from the French School, advanced Cantillon’s work, but added that entrepreneurship was essentially a form of management. Say “put the entrepreneur at the core of the entire process of production and distribution” (Hebert & Link, 2009, p. 17). Say’s work resulted in something similar to a general theory of entrepreneurship with three distinct functions; “scientific knowledge of the product; entrepreneurial industry – the application of knowledge to useful purpose; and productive industry – the manufacture of the item by manual labour” (Chell, 2008, p. 20). Frank Knight made several contributions to entrepreneurship theory, but another of note is how he distinguished an entrepreneur from a manager. He suggested that a manager crosses the line to become an entrepreneur “when the exercise of his/her judgment is liable to error and s/he assumes the responsibility for its correctness” (Chell, 2008, p. 33). Knight said that entrepreneurs calculate the risks associated with uncertain business situations and make informed judgments and decisions with the expectation that – if they assessed the situation and made the correct decisions – they would be rewarded by earning a profit. Those who elect to avoid taking these risks choose the relative security of being employees (Chell, 2008). Alfred Marshall (1842-1924), from the English School of thought, was one of the founders of neoclassical economics. His research involved distinguishing between the terms capitalist, entrepreneur, and manager. Marshall saw capitalists as individuals who “committed themselves to the capacity and honesty of others, when he by himself had incurred the risks for having contributed with the capital” (Zaratiegui & Rabade, 2005, p. 775). An entrepreneur took control of money provided by capitalists in an effort to leverage it to create more money; but would lose less if something went wrong then would the capitalists. An entrepreneur, however, risked his own reputation and the other gains he could have made by pursuing a different opportunity. Let us suppose that two men are carrying on smaller businesses, the one working with his own, the other chiefly with borrowed capital. There is one set of risks which is common to both; which may be 11 described as the trade risks of the particular business … But there is another set of risks, the burden of which has to be borne by the man working with borrowed capital, and not by the other; and we may call them personal risks (Marshall, 1961, p. 590; Zaratiegui & Rabade, 2005, p. 776). Marshall recognized that the reward capitalists received for contributing capital was interest income and the reward entrepreneurs earned was profits. Managers received a salary and, according to Marshall, fulfilled a different function than either capitalists or entrepreneurs – although in some cases, particularly in smaller firms, one person might be both an entrepreneur and a manager. Managers “were more inclined to avoid challenges, innovations and what Schumpeter called the ‘perennial torment of creative destruction’ in favor of a more tranquil life” (Zaratiegui & Rabade, 2005, p. 781). The main risks they faced from firm failure were to their reputations or to their employment status. Managers had little incentive to strive to maximize profits (Zaratiegui & Rabade, 2005). Amasa Walker (1799-1875) and his son Francis Walker (1840-1897) were from the American School of thought, and they helped shape an American perspective of entrepreneurship following the Civil War of 1861-1865. These scholars claimed that entrepreneurs created wealth, and thus played a different role than capitalists. They believed that entrepreneurs had the power of foresight and leadership qualities that enabled them to organize resources and inject energy into activities that create wealth (Chell, 2008). Entrepreneurship versus Entrepreneur Adam Smith (1723-1790), from the English School of thought, published An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. In a departure from the previous thought into entrepreneurship and economics, Smith did not dwell on a particular class of individual. He was concerned with studying how all people fit into the economic system. Smith contended that the economy was driven by self interest in the marketplace (Chell, 2008). Also from the English School, David Ricardo (1772-1823) was influenced by Smith, Say, and others. His work focused on how the capitalist system worked. He explained how manufacturers must invest their capital in response to the demand for the products they produce. If demand decreases, manufacturers should borrow less and reduce their workforces. When demand is high, they should do the reverse (Chell, 2008). Carl Menger (1840-1921), from the Austrian School of thought, ranked goods according to their causal connections to human satisfaction. Lower order goods include items like bread that directly satisfy a human want or need like hunger. Higher order goods are those more removed from satisfying a human need. A second order good is the flour that was used to make the bread. The grain used to make the flour is an even higher order good. Entrepreneurs coordinate these factors of production to turn higher order goods into lower order goods that more directly satisfy human wants and needs (Hebert & Link, 2009). Menger (1950 [1871], p. 160) established that entrepreneurial activity includes: (a) obtaining information about the economic situation, (b) economic calculation – all the various computations that must be made if a production process is to be efficient, (c) the act of will by which goods of higher order are assigned to a particular production process, and (d) supervising the execution of the production plan so that it may be carried through as economically as possible (Hebert & Link, 2009, p. 43). Entrepreneurship and Innovation Jeremy Bentham (1748-1832), from the English School of thought, considered entrepreneurs to be innovators. They “depart from routine, discover new markets, find new sources of supply, improve existing products and lower the costs of production” (Chell, 2008). Joseph Schumpeter’s (1883-1950) parents were Austrian, he studied at the University of Vienna, conducted research at the University of Graz, served as Austria’s Minister of Finance, and was the president of a bank in the country. Because of the rise of Hitler in Europe, he went to the United States and conducted research at Harvard until he retired in 1949. Because of this, he is sometimes associated with the American School of thought on entrepreneurship (Chell, 2008). Whereas Menger saw entrepreneurship as occurring because of economic progress, Schumpeter took the opposite stance. Schumpeter saw economic activity as leading to economic development (Hebert & Link, 2009). 12 Entrepreneurs play a central role in Schumpeter’s theory of economic development, and economic development can occur when the factors of production are assembled in new combinations. Schumpeter (1934) viewed innovation as arising from new combinations of materials and forces. He provided the following five cases of new combinations. 1. The introduction of a new good – that is one with which consumers are not yet familiar – or of a new quality of good. 2. The introduction of a new method of production, that is one not yet tested by experience in the branch of manufacture concerned, which need by no means be founded upon a discovery scientifically new, and can also exist in a new way of handling a commodity commercially. 3. The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before. 4. The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created. 5. The carrying out of the new organization of any industry, like the creation of a monopoly position … or the breaking up of a monopoly position (Schumpeter, 1934, p. 66). Another concept popularized by Schumpeter – in addition to the notion of new combinations – was creative destruction. This was meant to indicate that the existing ways of doing things need to be dismantled – to be destroyed – to enable a transformation through innovation to a new way of doing things. Entrepreneurs use innovation to disrupt how things are done and to establish a better way of doing those things. Basic Questions in Entrepreneurship Research According to Baron (2004a), there are three basic questions of interest in the field of entrepreneurship: Why do some persons but not others choose to become entrepreneurs? Why do some persons but not others recognize opportunities for new products or services that can be profitably exploited? Why are some entrepreneurs so much more successful than others (Baron, 2004a, p. 221)? To understand where these foundational research questions came from and what their relevance is today, it is useful to study what entrepreneurship research has uncovered so far. Entrepreneurial Uniqueness Efforts to teach entrepreneurship have included descriptions of entrepreneurial uniqueness based on personality, behavioral, and cognitive traits (Chell, 2008; Duening, 2010). • Personality characteristics o Three personality characteristics of entrepreneurs that are often cited are: • Need for achievement • Internal locus of control (a belief by an individual that they are in control of their own destiny) • Risk-taking propensity • Behavioral traits • Cognitive skills of successful entrepreneurs Past studies of personality characteristics and behavioral traits have not been overly successful at identifying entrepreneurial uniqueness. As it turned out, years of painstaking research along this line has not borne significant fruit. It appears that there are simply not any personality characteristics that are either essential to, or defining of, entrepreneurs that differ systematically from non-entrepreneurs…. Again, investigators proposed a number of behavioral candidates as emblematic of entrepreneurs. Unfortunately, this line of research also resulted in a series of dead ends as examples of successful entrepreneurial behaviors had equal counterparts among samples of non-entrepreneurs. As with the personality characteristic school of thought before it, the behavioral trait school of thought became increasingly difficult to support (Duening, 2010, pp. 4-5). 13 This shed doubt on the value of trying to change personality characteristics or implant new entrepreneurial behaviors through educational programs in an effort to promote entrepreneurship. New research, however, has resurrected the idea that there might be some value in revisiting personality traits as a topic of study. Additionally, Duening (2010) and has suggested that an important approach to teaching and learning about entrepreneurship is to focus on the “cognitive skills that successful entrepreneurs seem uniquely to possess and deploy” (p. 2). In the next sections we consider the new research on entrepreneurial personality traits and on entrepreneurial cognitions. Entrepreneurial Personality Traits While acknowledging that research had yet to validate the value of considering personality and behaviour traits as ways to distinguish entrepreneurs from non-entrepreneurs or unsuccessful ones, Chell (2008) suggested that researchers turn their attention to new sets of traits including: “the proactive personality, entrepreneurial selfefficacy, perseverance and intuitive decision-making style. Other traits that require further work include social competence and the need for independence” (p. 140). In more recent years scholars have considered how the Big Five personality traits – extraversion, agreeableness, conscientiousness, neuroticism (sometimes presented as emotional stability), and openness to experience (sometimes referred to as intellect) – might be used to better understand entrepreneurs. It appears that the Big Five traits might be of some use in predicting entrepreneurial success. Research is ongoing in this area, but in one example, Caliendo, Fossen, and Kritikos (2014) studied whether personality constructs might “influence entrepreneurial decisions at different points in time” (p. 807), and found that “high values in three factors of the Big Five approach—openness to experience, extraversion, and emotional stability (the latter only when we do not control for further personality characteristics)—increase the probability of entry into self-employment” (p. 807). They also found “that some specific personality characteristics, namely risk tolerance, locus of control, and trust, have strong partial effects on the entry decision” (p. 807). They also found that people who scored higher on agreeableness were more likely to exit their businesses, possibly meaning that people with lower agreeableness scores might prevail longer as entrepreneurs. When it came to specific personality traits, their conclusions indicated that those with an external locus of control were more likely to stop being self-employed after they had run their businesses for a while. There are several implications for research like this, including the potential to better understand why some entrepreneurs behave as they do based upon their personality types and the chance to improve entrepreneurship education and support services. Entrepreneurial Cognitions It is only fairly recently that entrepreneurship scholars have focused on cognitive skills as a primary factor that differentiates successful entrepreneurs from non-entrepreneurs and less successful entrepreneurs. This approach deals with how entrepreneurs think differently than non-entrepreneurs (Duening, 2010; Mitchell et al., 2007). Entrepreneurial cognitions are the knowledge structures that people use to make assessments, judgments or decisions involving opportunity evaluation and venture creation and growth. In other words, research in entrepreneurial cognition is about understanding how entrepreneurs use simplifying mental models to piece together previously unconnected information that helps them to identify and invent new products or services, and to assemble the necessary resources to start and grow businesses (Mitchell, Busenitz, et al., 2002, p. 97). Mitchell, Smith, et al. (2002) provided the example of how the decision to create a new venture (dependent variable) was influenced by three sets of cognitions (independent variables). They described these cognitions as follows: Arrangements cognitions are the mental maps about the contacts, relationships, resources, and assets necessary to engage in entrepreneurial activity; willingness cognitions are the mental maps that support commitment to venturing and receptivity to the idea of starting a venture; ability cognitions consist of the knowledge structures or scripts (Glaser, 1984) that individuals have to support the capabilities, skills, norms, and attitudes required to create a venture (Mitchell et al., 2000). These variables draw on the idea that cognitions are structured in the minds of individuals (Read, 1987), and that these knowledge structures act as “scripts” that are the antecedents of decision making (Leddo & Abelson, 1986, p. 121; Mitchell, Smith, et al., 2002, p. 10) 14 Cognitive Perspective to Understanding Entrepreneurship According to Baron (2004a), by taking a cognitive perspective, we might better understand entrepreneurs and the role they play in the entrepreneurial process. The cognitive perspective emphasizes the fact that everything we think, say, or do is influenced by mental processes—the cognitive mechanisms through which we acquire store, transform, and use information. It is suggested here that this perspective can be highly useful to the field of entrepreneurship. Specifically, it can assist the field in answering three basic questions it has long addressed: (1) Why do some persons but not others choose to become entrepreneurs? (2) Why do some persons but not others recognize opportunities for new products or services that can be profitably exploited? And (3) Why are some entrepreneurs so much more successful than others (Baron, 2004a, pp. 221-222)? Baron (2004a), illustrated how cognitive differences between people might explain why some people end up pursuing entrepreneurial pursuits and others do not. For example, prospect theory (Kahneman & Tversky, 1977) and other decision-making or behavioral theories might be useful in this regard. Research into cognitive biases might also help explain why some people become entrepreneurs. Baron (2004a) also revealed ways in which cognitive concepts like signal detection theory, regulation theory, and entrepreneurial might help explain why some people are better at entrepreneurial opportunity recognition. He also illustrated how some cognitive models and theories – like risk perception, counterfactual thinking, processing style, and susceptibility to cognitive errors – might help explain why some entrepreneurs are more successful than others. Cognitive Perspective and the Three Questions Why do some and not others choose to become entrepreneurs? Prospect Theory Cognitive Biases Why are some people better at recognizing entrepreneurial opportunities? Signal Detection Theory Regulation Theory Entrepreneurial Alertness Why are some people more successful at entrepreneurship than others? Risk Perception Counterfactual Thinking Processing Style Susceptibility to Cognitive Errors Entrepreneurial Scripts Why do some people, or groups of people, achieve high performance economic results while others do not? Is there a relationship between the attainment of high performance economic results and transaction cognitions (a type of economic thought pattern)? “Cognition has emerged as an important theoretical perspective for understanding and explaining human behavior and action” (Dutta & Thornhill, 2008, p. 309). Cognitions are all processes by which sensory input is transformed, reduced, elaborated, stored, recovered, and used (Neisser, 1976). Cognitions lead to the acquisition of knowledge, and involve human information processing. Knowledge structure/script: Is a mental model, or information processing short-cut that can give information form and meaning, and enable subsequent interpretation and action. The subsequent interpretation and actions can result in expert performance … they can also result in thinking errors. Entrepreneurial scripting exercises are critical to giving learners an explicit understanding of: 15 the processes that transfer expertise, and the actual expertise itself. The structure of scripts (based upon Mitchell (2000) Scripts are generally framed as a linear sequence of steps, usually with feedback loops, that can explain how to achieve a particular task – perhaps like developing a business plan. Sometimes scripts can be embedded within other scripts. For example, within a general venturing script that outlines the sequences of activities that can lead to a successful business launch, there will probably be sub-scripts describing how entrepreneurs can search for ideas, screen those ideas until one is selected, plan how to launch a sustainable business based upon that idea and including securing the needed financial resources, setting up the business, starting it, effectively managing its ongoing operations, and managing the venture such that that entrepreneur can extract the value that they desire from the enterprise at the times and in the ways they want it. The most effective scripts include an indication of the norms that outline performance standards and indicate how to determine when any step in the sequence has been properly completed. General Venturing Script Generally, entrepreneurship is considered to consist of the following elements, or subscripts (Brooks, 2009; Mitchell, 2000). • • • • • Searching Idea Screening Planning and Financing Set-Up Start-Up Ongoing Operations Harvest Searching (also called idea formulation or opportunity recognition) • This script begins when a person decides they might be a potential entrepreneur (or when an existing entrepreneur decides they need more ideas in their idea pool). • This script ends when there are a sufficient number of ideas in the idea pool. • The scripting process involves a logical flow of steps (including feedback loops, actions which must occur in sequence, and actions which can be implemented at the same time as other actions) designed to: • overcome mental blockages to creativity which might hinder this person’s ability to identify viable ideas; • implement steps to identify a sufficient number of ideas (most likely 5 or more) which the person is interested in investigating to determine whether they might be viable given general criteria such as this person’s personal interests and capabilities; Idea Screening (also called concept development) • This script begins when the person with the idea pool is no longer focusing on adding new ideas to it; but is instead taking steps to choose the best idea for them given a full range of specific criteria. • This script ends when one idea is chosen from among those in the idea pool. • The scripting process involves a logical flow of steps to assess the current situation and the trends in the following areas. The right tools must be used for each level of analysis. • Do the current societal-level factors indicate that a particular idea should be considered for implementation? Do the trends in these societal-level factors indicate that the idea will be viable and sustainable into the future? o Evaluate the political, economic, social, technological, environmental, and legal climates • Do the current industry/market-level factors indicate an idea is viable? Are the trends in these factors supportive of the idea? o Evaluate the degree of competitiveness in the industry, the threat of substitutes emerging, the threat of new entrants to the industry, the degree of bargaining power of 16 buyers, and the degree of bargaining power of suppliers. o Do a market profile analysis to assess the attractiveness of the position within the industry that the potential venture will occupy. • Do the current firm-level factors support the pursuit of the idea? o Formulate and evaluate potential strategies to leverage organizational strengths, overcome/minimize weaknesses, take advantage of opportunities, and overcome/ minimize threats; o Complete financial projections and analyze them to evaluate financial attractiveness; o Assess the founder fit with the ideas; o Evaluate the core competencies of the organization relative to the idea; o Assess advice solicited from trusted advisors Planning and Financing (also called resource determination and acquisition) • This script begins when the idea screening script ends and when the person begins making the plans to implement the single idea chosen from the idea pool, which is done in concert with securing financing to implement the venture idea. • This script ends when sufficient business planning has been done and when adequate financing has been arranged. • The scripting process involves a logical flow of steps to develop a business plan and secure adequate financing to start the business. Set-Up (also called launch) • This script begins when the planning and financing script ends and when the person begins implementing the plans needed to start the business. • This script ends when the business is ready to start-up. • The scripting process involves a logical flow of steps, including purchasing and installing equipment, securing the venture location and finishing all the needed renovations, recruiting and hiring any staff needed for start-up, and the many other steps needed to prepare for start-up. • Start-Up (also called launch) • This script begins when the set-up script ends and when the business opens and begins making sales. • This script ends when the business has moved beyond the point where the entrepreneur must continually fight for the business’s survival and persistence. It ends when the entrepreneur can instead shift emphasis toward business growth or maintaining the venture’s stability. • The scripting process involves a logical flow of steps needed to establish a new venture. Ongoing Operations (also called venture growth) • This script begins when the start-up script ends and when the business has established persistence and is implementing growth (or maintenance) strategies. • This script ends when the entrepreneur chooses to harvest the value they generated with the venture. The scripting process involves a logical flow of steps needed to grow (or maintain) a venture. Studying Entrepreneurship The following quotations from two preeminent entrepreneurship and entrepreneurship education researchers indicate the growing interest in studies in this field. 17 Entrepreneurship has emerged over the last two decades as arguably the most potent economic force the world has ever experienced. With that expansion has come a similar increase in the field of entrepreneurship education. The recent growth and development in the curricula and programs devoted to entrepreneurship and new-venture creation have been remarkable. The number of colleges and universities that offer courses related to entrepreneurship has grown from a handful in the 1970s to over 1,600 in 2005 (Kuratko, 2005, p. 577). Interest in entrepreneurship has heightened in recent years, especially in business schools. Much of this interest is driven by student demand for courses in entrepreneurship, either because of genuine interest in the subject, or because students see entrepreneurship education as a useful hedge given uncertain corporate careers (Venkataraman, 1997, p. 119). Approaches to Studying Entrepreneurship Entrepreneurship is a discipline, which means an individual can learn about it, and about how to be an effective entrepreneur. It is a myth that people are born entrepreneurs and that others cannot learn to become entrepreneurs (Drucker, 1985). Kuratko (2005) asserted that the belief previously held by some that entrepreneurship cannot be taught has been debunked, and the focus has shifted to what topics should be taught and how they should be covered. Solomon (2007) summarized some of the research on what should be covered in entrepreneurship courses, and how it should be taught. While the initial focus was on actions like developing business plans and being exposed to real entrepreneurs, more recently this approach has been supplemented by an emphasis on technical, industry, and personal experience. “It requires critical thinking and ethical assessment and is based on the premise that successful entrepreneurial activities are a function of human, venture and environmental conditions” (p. 172). Another approach “calls for courses to be structured around a series of strategic development challenges including opportunity identification and feasibility analysis; new venture planning, financing and operating; new market development and expansion strategies; and institutionalizing innovation” (p. 172). This involves having students interact with entrepreneurs by interviewing them, having them act as mentors, and learning about their experiences and approaches through class discussions. Sources of Information for Studying Entrepreneurship According to Kuratko (2005), “three major sources of information supply the data related to the entrepreneurial process or perspective” (p. 579). Publications (both research-based and those written for the general public) Research-based publications: Academic journals like Entrepreneurship Theory and Practice, Journal of Business Venturing, and Journal of Small Business Management Proceedings of conferences like Proceedings of the Academy of Management and Proceedings of the Administrative Sciences Association of Canada Publications written for practitioners and the general public Textbooks on entrepreneurship Books about entrepreneurship Biographies or autobiographies of entrepreneurs News periodicals like Canadian Business and Profit Trade periodicals like Entrepreneur and Family Business Government publications available through sources like the Enterprise Saskatchewan and Canada-Saskatchewan Business Service Centre (CSBSC) websites and through various government resource centers Direct observation and interaction with practicing entrepreneurs Data might be collected from entrepreneurs and about entrepreneurs through surveys, interviews, or other methods applied by researchers. Speeches and presentations by practicing entrepreneurs The Language of Entrepreneurship 18 Effectuation (and effectual reasoning) Sarasvathy (2001) distinguished between effectuation and causation when examining how entrepreneurs approached entrepreneurial challenges. He found that the uncertainty surrounding entrepreneurship – particularly with respect to challenges involving undefined end goals, like how starting a business might turn our relative to what was originally envisioned – led to what he called effectual reasoning. Entirepreneur Bolton and Thompson (2015) coined a new term, entirepreneurs, in response to what they described as today’s new normal characterized by turbulence and uncertainty in the world. In this environment they claim that success is not easily achieved by an entrepreneur starting a business, then passing it on to a manager to run who eventually may need to give way to a strategic leader to ensure the venture’s continuing success (or perhaps to save it from failing). Entirepreneurs embody the attributes of all of those categories of individuals. Entirepreneurs successfully combine the attributes we conventionally associate with entrepreneurs, leaders and managers. They make an all-round contribution. Significantly, they appreciate the needs of different circumstances and challenges and flexibly adjust their style and approach. Sometimes they behave in a way we would conventionally describe as entrepreneurial; on other occasions they exhibit conventional leadership; at other times they are ‘managerial’ (Bolton & Thompson, 2015, p. 24). Innovation Innovation is “the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations” (Organization for Economic Co-Operation and Development, 2005). Internal Locus of Control The term internal locus of control refers to a belief by an individual that they are in control of their own destiny. Self-Efficacy Self-efficacy refers to a belief by an individual in their personal capability to be an effective entrepreneur. Selfefficacy is different than self-confidence because self-efficacy is generally based upon past successes that lead to a heightened belief in abilities whereas an individual might be self-confident even without that confidence resulting from a history of successes. 19 Chapter 2 – Opportunity Recognition and Design Thinking Entrepreneurs see ways to put resources and information together in new combinations. They not only see the system as it is, but as it might be. They have a knack for looking at the usual and seeing the unusual, at the ordinary and seeing the extraordinary. Consequently, they can spot opportunities that turn the commonplace into the unique and unexpected (Mitton, 1989, p. 12). In my opinion, all previous advances in the various lines of invention will appear totally insignificant when compared with those which the present century will witness. I almost wish that I might live my life over again to see the wonders which are at the threshold. Charles H. Duell, Commissioner, U.S. Office of Patents, 1898-1901 (who has been incorrectly quoted as having said “Everything that can be invented has been invented”). The significant problems we face cannot be solved at the same level of thinking we were at when we created them – Albert Einstein (1879-1955). I think there is a world market for maybe five computers – Thomas Watson (1874-1956), Chairman of IBM, 1943. Learning Objectives After completing this chapter you will be able to: • • • Discuss opportunity recognition concepts and methods as developed and/or advocated by leading thinkers like Drucker, Mitchell, Schumpeter, and Vesper. Describe what design thinking is. Apply design thinking to develop and assess new venture ideas. Overview This chapter introduces a sample of perspectives and tools designed to help individuals recognize potential business opportunities. The concept of design thinking is also examined in some detail. The objective is to help you improve your ability to apply inspiration, ideation, and implementation as part of the design thinking process. Opportunity Recognition The following are examples of entrepreneurship theorists and practitioners who have developed the concept of opportunity recognition. The tools introduced in the next sections can be applied for a variety of purposes, but they are particularly useful for recognizing new venture opportunities. Baron Opportunity recognition is: the active, cognitive process (or processes) through which individuals conclude that they have 20 identified the potential to create something new that has the potential to generate economic value and that is not currently being exploited or developed, and is viewed as desirable in the society in which it occurs (i.e. its development is consistent with existing legal and moral conditions) (Baron, 2004b, p. 52). According to Baron (2004b), opportunity recognition is a cognitive process, which means that people can learn to be more effective at recognizing opportunities. They can learn this skill by changing the way in which they think about opportunities and how to recognize them. Drucker Systematic innovation involves “monitoring seven sources for innovative opportunity” (Drucker, 1985, p. 35). The first four are internally focused, within the business or industry, in that they may be visible to those involved in that organization or sector. The last three involve changes outside the business or industry. • • Internally Focused o The unexpected – the unexpected success, the unexpected failure, the unexpected outside event; o The incongruity – between reality as it actually is and reality as it is assumed to be or as it ought to be; o Innovation based on process need; o Changes in industry structure or market structure that catch everyone unawares. Externally Focused o Demographics (population changes); o Changes in perception, mood, and meaning; o New knowledge, both scientific and nonscientific (Drucker, 1985, p. 35). Mitchell TM One of the components of Mitchell’s (2000) New Venture Template asks whether the venture being examined represents a new combination. He suggests considering two categories of entrepreneurial discovery: scientific discovery and circumstance. • • Scientific Discovery o Physical/technological insight o New and valuable way Circumstantial Discovery o Specific knowledge of time, place or circumstance When and what you know The second set of variables to consider are the market imperfections that can give rise to profit opportunities: excess demand and excess supply. This gives rise to the following four types of entrepreneurial discovery. 21 Figure 2 – Four Sources for Entrepreneurial Discovery • • • • Invention I o Uses Science to exploit excess demand (a market imperfection) o Opportunity to discover and apply the laws of nature to satisfy excess demand Inventions in one industry have ripple effects in others o Example: invention of airplane Observation o Circumstances reveals opportunity to exploit excess demand (a market imperfection) Not necessarily science oriented o Example: airline industry – need for food service for passengers Invention II o Uses science to exploit excess supply (a market imperfection) o Example: Second most abundant element on earth after oxygen = silicon microchips …. manure fertilizer, power …. tire recycling Coordination o Circumstances reveals opportunity to exploit excess supply (a market imperfection) o Example: Producer’s capacities to lower prices – Wal-Mart Schumpeter Schumpeter’s (1934) five kinds of new combinations (see page 13) can occur within each of the four kinds of entrepreneurial discovery (Mitchell, 2000). • • 22 New or improved good/service o Products/services that are new, improved … quality o Distinction between “true” advances vs. promotional differences New method of production o Assembly line method to automobile production Just in time, robotics, agricultural processing Opening of a new market o Global context: Culture, laws, local buyer preferences, business practices, customs, communication, transportation…setting up a new distribution channel o • • Honda created a new market for smaller modestly powered motorbikes Conquest of a new source of supply of raw materials o Enhance availability of products by providing at less cost o Enhance availability by making more available without compromising quality Reorganization of an industry Murphy Murphy (2011) claimed that there was a single dimensional logic that oversimplified the approach taken to understand entrepreneurial discovery. He was bothered by the notion that entrepreneurs either deliberately searched for entrepreneurial opportunities or they serendipitously discovered them. This relationship is shown in Figure 3. Figure 3 – A Unidimensional Model of Entrepreneurial Discovery (Murphy, 2011, p. 8) Figure 4 shows Murphy’s (2011) multidimensional model of entrepreneurial discovery. This perspective is meant to indicate that opportunities may be identified (a) through a purposeful search (Deliberate Search quadrant); (b) because others provide the opportunity to the entrepreneur (Legacy quadrant); (c) through prior knowledge, entrepreneurial alertness, and means other than a purposeful search (Serendipitous Discovery quadrant); and, (d) through a combination of lucky happenstance and deliberate searching for opportunities (Eureka quadrant). 23 Figure 4 – A Multidimensional Model of Entrepreneurial Discovery (Murphy, 2011, p. 9) Vesper According to experimentation research, entrepreneurial creativity is not correlated with IQ (people with high IQs can be unsuccessful in business and those with lower IQs can be successful as an entrepreneur). Research has also shown that those who practice idea generation techniques can become more creative. The best ideas sometimes come later in the idea-generation process – often in the days and weeks following the application of the idea-generating processes (Vesper, 1996). Vesper (1996) identified several ways in which entrepreneurs found ideas: • • Prior job Recreation • • Chance event Answering discovery questions “Although would-be entrepreneurs usually don’t discover ideas by a deliberate searching strategy (except when pursuing acquisitions of ongoing firms), it is nevertheless possible to impute to their discoveries some implicit searching patterns” (Vesper, 1996, p. 60). Vesper categorized discovery questions as follows: 24 • Search questions, which might prompt venture ideas by placing one’s mind into a mode where the subconscious will work to push ideas into the conscious mind. Examples of these questions include the following (Vesper, 1996). o What is bothering me, and what might relieve that bother? o How could this be made or done differently that it is now? o What else might I like to have? o How can I fall the family tradition? • Questions based on encounters with a potential customer request, someone else’s idea, or another event include the following (Vesper, 1996). o Can I play some role in providing this product or service to a broader market? o Could there be a way to do this better for the customer? • Questions based on evaluative reactions to ideas include the following (Vesper, 1996). o Could I do this job on my own instead of as an employee? o If people elsewhere went for this idea, might they want it here too? Vesper (1996) also highlighted several mental blocks to departure. He suggested that generating innovative ideas involved two tasks. The first is to depart from what is usual or customary. The second is to apply an effective way to direct this departure. The mental blocks in the way of departure include the following. • • • • • • • Perceptual blocks include: o difficulty viewing things from different perspectives o seeing only what you expect to see or think what others expect you to see Emotional blocks include: o intolerance of ambiguity o preference for judging rather than seeking ideas tunnel vision o insufficient patience Cultural blocks include: o a belief that reason and logic are superior to feeling, intuition, and other such approaches thinking that tradition is preferable to change o disdain for fantasy, reflection, idea playfulness, humor Imagination blocks include: o fear of subconscious thinking o inhibition about some areas of imagination Environmental blocks include: o distrust of others who might be able to help distractions o discouraging responses from other people Intellectual blocks include: o lack of information incorrect information o weak technical skills in areas such as financial analysis Expressive blocks include: o 25 poor writing skills o inability to construct prototypes Understanding these mental blocks to departure is a first step in figuring out how to cope with them. Some tactics for departure include the following (Vesper, 1996): • • • Try different ways of looking at and thinking about venture opportunities Try to continually generate ideas about opportunities and how to exploit them Seek clues from business and personal contacts, trade shows, technology licensing offices, and other sources • Don’t be discouraged by others’ negative views because many successful innovations were first thought to be impossible to make • Generate possible solutions to obstacles before stating negative views about them • Use idea generating tricks like: o Brainstorming o Considering multiple consequences of possible future events or changes o Rearranging, reversing, expanding, shrinking, combining, or altering ideas o Developing scenarios Design Thinking “Design thinking is a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success – Tim Brown, president and CEO” (IDEO, 2015, para. 5). The Hasso Plattner Institute of Design at Stanford University, called the d.school, is an acknowledged leader at promoting design thinking. You can download the Bootcamp Bootleg manual from the Standford d.school website. The following description of design thinking is from the IDEO website: Design thinking is a deeply human process that taps into abilities we all have but get overlooked by more conventional problem-solving practices. It relies on our ability to be intuitive, to recognize patterns, to construct ideas that are emotionally meaningful as well as functional, and to express ourselves through means beyond words or symbols. Nobody wants to run an organization on feeling, intuition, and inspiration, but an over-reliance on the rational and the analytical can be just as risky. Design thinking provides an integrated third way. The design thinking process is best thought of as a system of overlapping spaces rather than a sequence of orderly steps. There are three spaces to keep in mind: inspiration, ideation, and implementation. Inspiration is the problem or opportunity that motivates the search for solutions. Ideation is the process of generating, developing, and testing ideas. Implementation is the path that leads from the project stage into people’s lives (IDEO, 2015, para. 7-8). 26 Chapter 9 – Innovation and Entrepreneurship While the idea of the entrepreneur and entrepreneurship has evolved to include the attributes of innovation, opportunity discovery (or construction) and value creation, my sense of the basic gist of the term continues to focus on this facet of human behavior: initiative taking. The process of entrepreneurship invariably involves an individual or individuals investing effort into something they had not previously done before (Fayolle, 2007, p. ix). Learning Objectives After completing this chapter you will be able to: • Describe how innovation and entrepreneurship are interrelated concepts • Describe the building blocks for both innovation and successful entrepreneurship • Explain the elements of innovation Overview This chapter introduces the building blocks for both innovation and successful entrepreneurship while describing how innovation and entrepreneurship are interrelated concepts. It continues with a discussion about competencies – and specifically core competencies – as necessary building blocks for both innovation and successful entrepreneurship. The elements of innovation are also discussed. Innovation and Entrepreneurship The concepts of innovation and entrepreneurship are undeniably interrelated. Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service. It is capable of being presented as a discipline, capable of being learned, capable of being practiced. Entrepreneurs need to search purposefully for the sources of innovation, the changes and their symptoms that indicate opportunities for successful innovation. And they need to know and to apply the principles of successful innovation (Drucker, 1985, p. 19). Drucker (1985) claimed that innovation should be viewed as an economic or social phenomenon rather than a technological term. Innovation is not about making new inventions, but rather about recognizing how to take advantage of opportunities and changes. “Systematic innovation therefore consists in the purposeful and organized search for changes, and in the systematic analysis of the opportunities such changes might offer for economic or social innovation” (p. 35). This is consistent with Schumpeter’s (1934) view that innovation arises from new combinations of materials and forces. To better understand the interrelationship between innovation and entrepreneurship we will consider some of the building blocks for both innovation and successful entrepreneurship. Competencies and Core Competence Competencies are the necessary ingredients for entrepreneurial competence. Individual competencies are the combination of learnable behaviors that encompass attitudes (wanting to do), skills (how to do), knowledge (what to do), practical experiences (proven learning), and natural talents of a person in order to effectively accomplish an explicit goal within a specific context. Collective competencies are the synergistic combination of the individual competencies of team members within organizations. There is a continuum that exists from low-functioning teams to high-functioning teams. High-functioning teams, although very rare, are those that apply collective competencies the most effectively (Matthews & Brueggemann, 2015, p. 10). 27 Core competencies are those that are collectively held and that include “the learnable behaviors the entire organization must practice in order to achieve competence in relation to the organization’s purpose and its competitive environment. A core competency encompasses the knowledge, skills, and technology that create unique customer value” (Matthews & Brueggemann, 2015, p. 11). Organizations need to identify what core competencies they need to cultivate in their precious human resources in order to meet a competence level that rises above the competition. The three tests to identify a core competence are: 1. First, a core competence provides potential access to a wide variety of markets. 2. Second a core competence should make a significant contribution to the perceived benefit of the end product. 3. Finally a core competence should be difficult for competitors to imitate (Matthews & Brueggemann, 2015, p. 12). Entrepreneurs must assess their individual competencies along with those of their organizations to better understand how to fill competency gaps and how to build collective and core competencies. Elements of Innovation Matthews and Brueggemann (2015) identified the following 12 elements of innovation. They argued that innovation is best understood by first examining each of the following elements. Innovation Degrees Incremental innovations are small-scale improvements on what is already being done, often with the intention to improve efficiencies to reduce costs, or improve products or services offered. “Both Six Sigma and Lean are wellregarded managerial quality improvement programs that explicitly target the removal of many types of organizational waste and variability …. An incremental innovation can be used to differentiate products for marketing purposes” (Matthews & Brueggemann, 2015, p. 34). Evolutionary innovations involve doing new things for existing customers and markets, and also doing things that extend product offerings to new customers and new markets (Matthews & Brueggemann, 2015). Revolutionary innovations are when businesses pursue new products, businesses, customers, and markets. The impacts from these types of innovations can be much higher than from either incremental or evolutionary innovations (Matthews & Brueggemann, 2015). Innovation Types There are many types of innovations. “Organizing innovation into types makes it is easier to understand how you can use multiple types of innovation simultaneously. The fundamental innovation types include products, customer experiences, solutions, systems, processes, and business and managerial models” (Matthews & Brueggemann, 2015, p. 37). Innovation Direction Innovation direction is a concept that encompasses forward and reverse innovation. Innovation direction is a notion that is based on the source and target of the innovation. A forward innovation would have its source in country X and the target in country X. A reverse innovation would have its source in country Y and later targeted to a different country such as country X. Country X or Y could be a developed or developing country (Matthews & Brueggemann, 2015, p. 40). 28 Innovation Risk The entrepreneurial ecosystem described earlier in this book indicated that there are many individuals, firms, and organizations that are interconnected in ways that impact each other. According to Matthews and Brueggemann (2015), co-innovation risk occurs when multiple actors in the ecosystem are attempting to innovate and that leads to the possibility that a new innovation developed by one company is ready at a different time than a dependent second innovation developed by another firm. For example, it can be disastrous for a computer hardware company to release a new product that is dependent upon new software if the company developing that software does not make it available on time. Adoption chain risk also occurs when multiple firms in the value chain are simultaneously developing new products and services. If one firm, for example, releases a product that must be serviced by a different company before that other company is prepared to offer that service, the product release can fail (Matthews & Brueggemann, 2015). Innovation Principles and Tenets Both non-profit and for-profit organizations are governed by principles that dictate how they operate. Non-profits often strive to alleviate social problems while for-profits attempt to satisfy the desires of their shareholders. In today’s world an increasing number of organizations are adopting alternative measures of performance that include not only economic outcomes, but also social and environmentally responsible results; a triple bottom line (Kneiding & Tracey, 2009). This can – and should – lead to organizations redefining themselves as pursuing the creation of shared value rather than just profits (Matthews & Brueggemann, 2015; Porter & Kramer, 2011). Companies must take the lead in bringing business and society back together. The recognition is there among sophisticated business and thought leaders, and promising elements of a new model are emerging. Yet we still lack an overall framework for guiding these efforts, and most companies remain stuck in a “social responsibility” mind-set in which societal issues are at the periphery, not the core. The solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking. The purpose of the corporation must be redefined as creating shared value, not just profit per se. This will drive the next wave of innovation and productivity growth in the global economy. It will also reshape capitalism and its relationship to society. Perhaps most important of all, learning how to create shared value is our best chance to legitimize business again (Porter & Kramer, 2011, p. 4). Innovation Thresholds Organizations should strive to achieve their innovation threshold. An innovation threshold is a marker that each business sector needs to achieve in order to be competitive. To thrive, an organization cannot under-innovate, while over-innovation would be wasteful and ineffectual. Innovation thresholds range from low to high, and are different for each business sector. Once an organization achieves the innovation threshold, additional innovation may not matter (Matthews & Brueggemann, 2015, p. 52). After achieving their innovation threshold such that more innovation might not generate enough extra value to make the effort worthwhile, organizations must rely on other innovation competencies. For example, some industries like insurance and airlines have a relatively low product innovation threshold, so after reaching it they must rely on other forms of innovation and entrepreneurship competencies “such as creativity, culture, strategy, leadership, and technology” (Matthews & Brueggemann, 2015, p. 53) to further advance their goals. Higher technology fields normally have higher product innovation thresholds, and can gain much by striving for more product innovations. 29 Innovation Criteria “The criteria that can be used to evaluate an innovation are desirability, feasibility, and viability. An innovative design needs to be desirable, feasible, and aligned with a sustainable business model” (Matthews & Brueggemann, 2015, p. 53). Innovation Processes Another element of innovation is the set of planned innovation processes that are required to make innovation happen. These processes must balance the need to provide customers with what they want with what is technologically feasible and financially viable. One example of an innovation process is design thinking. Innovation Diffusion Lundblad (2003) defined diffusion of innovation as “the adoption and implementation of new ideas, processes, products, or services” as she studied the diffusion of innovation “within and across organizations” (p. 51). This concept is particularly important because many sectors of the economy strive for organizational improvement, but “innovations often are not diffused within and across organizations to achieve improvement” (p. 51). To illustrate her point, she described how research in the health care sector has led to the development of new advancements in clinical practice and process improvements, yet – despite the relatively low cost to implement many of these process innovations – it often takes many years before these improvements are adopted into practice, if they ever are. This means that often there is a gap between when an innovation is developed and when it is implemented in practice. The Theory of the Diffusion of Innovation can help us understand what we must do in terms of implementing steps and processes for innovations to be diffused into the areas of practice where they are needed. There are four main elements of the theory. The first element of the theory is the innovation itself, whether that be an idea, a product, a process, or something else that is new to the potential adopters. The theory says that there are several characteristics of the innovation that affect its rate of adoption, including its complexity and its compatibility with whatever it will be connected with in some manner (Lundblad, 2003). The second element is communication; specifically the processes used by people to share the information needed to develop a common understanding. The rate of adoption will depend upon the sources of communication, even more so than the technical information contained in the messages (Lundblad, 2003). Time is the third element of the theory. According to Rogers (2003), who developed the Theory of the Diffusion of Innovation, there are three considerations related to the time element. The first is the innovation-decision process that describes the gap in time between when a potential early adopter learns about an innovation and either adopts it or doesn’t. There are several stages that the potential adopter goes through during this time frame. Second, Rogers (2003) classified potential adopters as “innovators, early adopters, early majority, late majority, and laggards” (Lundblad, 2003, p. 54) based upon how early they were likely to adopt an innovation. Finally, the rate of adoption describes how quickly the innovation is adopted. Innovation adoption tends to follow an S-shaped curve, meaning that only a few individuals initially adopt the innovation; but as time moves on and more and more individuals adopt, the rate increases. Eventually, though, the adoption rate levels off and begins to decline. (Lundblad, 2003, p. 54) The final element of the theory is social system. Rogers (2003) said that diffusion of innovation occurs within a social system, which might be somewhat limited, like the members of an organization, or widespread, like all of the consumers in a country. Some members within a social system influence others and include “opinion leaders, change agents, and champions” (Lundblad, 2003, p. 55). Innovation Pacing Innovation pacing refers to the speed with which an organization delivers innovations, and how that impacts its 30 ability to compete. “Pacing is influenced by your innovation capability and the ability of your customers to adopt those innovations” (Matthews & Brueggemann, 2015, p. 60). Innovation Value Red ocean strategies focus on competing with other players for market share within industries that currently exist. This type of thinking can be a constraint if it restricts organizations’ abilities to adapt to change and to figure out ways to pursue blue ocean strategies; namely entirely new markets, business models, industries, and other opportunities that other have not yet been conceptualized or pursued. Blue ocean strategies are not about competing with others, they are about rendering competitors irrelevant because they are not playing in the same field as your organization, and, more importantly, they are not matching the value that you create for customers in the new market that you opened up. “Value without innovation is an improvement that may not be sufficient for organic growth. Innovation without value does not provide the utility that customers would be willing to purchase. Innovation needs to be aligned with value comprised of utility, price, and cost” (Matthews & Brueggemann, 2015, p. 62). Disruptive Innovation The last of the 12 elements of innovation is disruptive innovation. Disruptive innovations are different than incremental, evolutionary, and revolutionary innovation degrees. A disruptive innovation is not a revolutionary innovation that makes other innovations, such as products and services, better. 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Upper Saddle River, NJ: Pearson Prentice Hall. 39 UC Davis Previously Published Works Title Design Thinking and Organizational Culture: A Review and Framework for Future Research Permalink https://escholarship.org/uc/item/5qh451j5 Journal Journal of Management, 44(6) ISSN 0149-2063 Authors Elsbach, Kimberly D Stigliani, Ileana Publication Date 2018-07-01 DOI 10.1177/0149206317744252 Peer reviewed eScholarship.org Powered by the California Digital Library University of California 744252 research-article2018 JOMXXX10.1177/0149206317744252Journal of ManagementElsbach, Stigliani / Design Thinking Journal of Management Vol. 44 No. 6, July 2018 2274–2306 DOI: https://doi.org/10.1177/0149206317744252 10.1177/0149206317744252 © The Author(s) 2018 Reprints and permissions: sagepub.com/journalsPermissions.nav Design Thinking and Organizational Culture: A Review and Framework for Future Research Kimberly D. Elsbach University of California–Davis Ileana Stigliani Imperial College Design th...
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