The Technological Entrepreneur's Playbook

Ian Chaston

• Publisher: Business Expert Press
• Year: 2017
• Print ISBN: 9781631578403
• eBook ISBN: 9781631578410
• Topic: Business
• Subtopic: Entrepreneurship
• Index: Business

As exemplified by Apple and Google, maximizing the wealth of organizations involves what Joseph Schumpeter described as "creative destruction." This occurs when scientific or technological breakthroughs lead to the launch of a radically new product or service at a time when there often is little or no evidence of the existence of an identified market opportunity. The world is currently involved in the third Industrial Revolution and academic research and real-world case studies have validated the fact that the management of technology-driven entrepreneurship is a somewhat different process to that of market-driven entrepreneurship. The existence of these differences generates the perspective that benefit exists in identifying managerial guidelines that can be of assistance in ensuring the success of technological entrepreneurship projects in both start-ups and existing businesses. Hence the aim of this text is to draw upon academic theory and real-world case materials as the basis for defining 86 key managerial guidelines for optimizing the outcome from involvement in technological entrepreneurship.

CHAPTER 1

Technology: The Wealth Generator

The Wealth of Nations

For thousands of years, wealth generation was based on trade or invading other countries and repatriating their wealth. This economic model was changed forever during the first Industrial Revolution. This occurred because technological entrepreneurs demonstrated that the creation of new forms of motive power and the development of new machines could move a nation from an agriculture-based economy to one centered around factory-based, large-scale manufacturing.

Industrialization cannot prevent the occurrence of economic cycles with periods of rising prosperity followed by economic downturns and rising unemployment. Factors that influence these cycles are (a) the belief that ownership of a specific asset would always lead to ever-increasing wealth, (b) the assumption that future income or gain in the value of assets would permit debt repayment, and (c) imbalances emerging between supply and demand. Evidence of the ongoing truism of economic cycles has recently been illustrated following the onset of the global downturn that commenced in 2007, from which many countries have yet to recover.

The catalyst for the weakened state of the global economy was the subprime mortgage fiasco in the United States where financial institutions approved loans to individuals who lacked the income sufficient to service the debt they had been persuaded to assume. As the scale of the problem became apparent, financial institutions either failed or had to be rescued by government intervention. Similar problems also emerged in Ireland and United Kingdom. These events were followed by recognition that in some countries in Europe, such as Greece and Spain, the level of public sector expenditure had become unsustainable. The outcome was the sovereign debt crisis that has been a massive burden dragging down the entire European Union (EU).

Meanwhile, multinational companies in sectors such as coal, oil, and minerals continued to invest in capacity expansion on the false premise of continued rising growth in the Chinese economy. When the first signs of a slowdown emerged in the Chinese economy, a massive decline in commodity prices was triggered. This had a devastating impact, especially in those countries reliant upon commodity exports as their primary source of economic growth and stability.

Even Milk Can Be Risky

White Gold

Case Aims: To illustrate the risks associated with an over reliance upon agriculture

New Zealand’s economy has been highly reliant upon agricultural output. Since World War II, dairy farming has become the dominant agricultural sector. A key problem is the country’s remote location relative to overseas markets, and milk is a highly perishable product. This situation led to the creation of Fonterra that was granted a near monopoly over the purchase of milk and assigned the task of using milk as a raw material to move the country further up the food industry value chain (Baldwin 2015).

Although raw milk production in New Zealand has risen dramatically, Fonterra’s success in moving into branded goods has been limited. As a consequence, the strategy of the company has been to invest in expanding the capability of converting raw milk into milk powder. This is essentially a commodity product, and hence, profit margins have remained relatively low.

New Zealand’s reputation for high quality has proved important in exploiting the growing demand for milk powder in China. As the Chinese economy continued to expand, New Zealand enjoyed a period of unprecedented economic growth. Furthermore, the country’s conservative banking sector practices and public sector spending meant the country was not adversely impacted by the Great Recession caused by the subprime mortgage in the United States and the sovereign debt crisis in Europe. As a consequence, by 2013, New Zealand’s self-perception was of a country enjoying a “golden age” of wealth generation.

Fonterra’s success relied upon rising market demand and minimal milk powder capacity expansion elsewhere in the world. In recent years, other countries have expanded milk powder production capacity in seeking to obtain a foothold in Asian markets. Further price competition emerged when the EU banned exports to Russia in response to the crisis in the Ukraine, causing more European producers to increase their efforts to develop new markets in the Far East. In 2014, the world milk powder market followed the pattern of other commodity markets of moving from boom to bust. The weakening Chinese economy and competition from elsewhere in the world resulted in a collapse in milk powder demand, with the resultant requirement of Fonterra needing to slash farm-gate milk prices. With dairy products representing almost 25 percent of the total exports and milk prices lower than the cost of production, recognition of the adverse impact of these events was reflected in growing concerns about the debt levels within the farming industry (Gray 2016).

Playbook Guideline 1: Avoid excessive reliance on commodities on the hopes that this offers a source of secure long-term wealth generation

The Importance of Innovation

Organizations that have enjoyed an extended period of profitability tend to become complacent about the future, and over time, operating costs tend to rise. New competitors, often based overseas, are not only assisted by rising costs within the incumbent firms, but are also often able to exploit advantages, such as lower labor or raw materials costs, thereby permitting them to compete on the basis of much lower prices (Nuvolari and Verspagen 2009).

Alert organizations are aware that standing still is a guarantee for moving backward. To avoid this outcome, these organizations have to accept the importance of sustaining investment in innovation. It can be considered that there are three dimensions to innovation. These are (1) product versus process, (2) radical versus incremental, and (3) competence enhancement. Product innovation results in an improved or new product or service proposition. Process innovation activity results in improving the effectiveness and efficiencies of production (Datta, Mukherjee, and Jessup 2015).

A long-established management philosophy is that, higher revenue comes from maximizing the retention time for products or services within the maturity phase of the product life cycle (or PLC). The means many firms focus on incremental innovation involving the launch of new, improved version of an existing product or service. An attraction of incremental innovation is that the investment costs are usually relatively small and the risk of market failure extremely low.

Another source of innovation is sectoral architecture, which is concerned with the relationships and interactions that a firm has created within a supply chain. A new firm may encounter obstacles in becoming accepted as a member of an existing sectoral architecture. One way of overcoming this problem is by creating a new, radically innovative alternative architecture. Such was the case with Michael Dell. At a time when other personal computer (PC) manufacturers were using either a sales force or a network of distributors to generate sales, he entered the market by using direct marketing and mail order to service customer needs. Over time, Dell has continually sought to add competitive advantage by further developing architectural innovation and has created a distinctive global, virtual supply network (Lawton and Michaels 2001).

Playbook Guideline 2: Risk minimization and minimal investment in innovation generates minimal financial returns

Detergents Facing an Emerging Risk?

Case Aims: To illustrate that even in low-tech sectors, the unexpected may occur

In a world increasingly concerned with adopting a more sustainable orientation toward the consumption of energy and natural resources, an obvious target for change is the humble washing machine. Interest in how to reduce water and energy consumption led researchers at Leeds University to examine the potential of using a large number of small nylon beads to fulfill the cleaning action within a washing machine.

The researchers discovered that by adding only a small amount of water sufficient to dissolve the stains on clothes and temporarily alter the molecular structure of the polymer beads, which gently rub against the materials being washed, it was possible to reduce water usage by 70 percent. Furthermore, the reduced water usage means that compared to conventional machines, as there is no longer a need for a rinse or spin cycle, energy consumption can be reduced by up to 98 percent, and carbon dioxide (CO₂) emissions reduced by approximately 40 percent. This breakthrough, which may become a problem for manufacturers of conventional washing machines, may possibly have even greater significant long-term adverse implications for the multinationals that currently dominate the global market for detergents.

To exploit the new approach to laundering clothes, spin-off company named Xeros Ltd has been created to market the technology (www.xeroscleaning.com). Led by CEO Mark Nichols, the company is seeking to refine every aspect of their polymer bead cleaning system in areas such enhancing bead absorbency and upgrading the efficiency of washing machines that utilize the new technology. To assist ongoing developments, the firm has entered into a partnership with BASF, the world’s largest chemical company, to investigate alternative bead chemistries for use in washing machines and custom-tailored detergents.

Playbook Guideline 3: Avoid complacency because in the end, everything has the potential to be impacted by unforeseen changes

Innovation

Radical innovation generates entirely different new products, services, processes, or delivery systems. As demonstrated by firms such as Apple and Google, the reward is exceptionally high profitability. Radicalness is a function of uniqueness when compared with currently available market offerings or production processes. The most radical innovations are new to the world and differ massively from existing products, services, or processes. In contrast, incremental innovation involves adaptations and refinements to existing products, services, processes, or delivery systems (Burgelman and McKinney 2006). Once an organization has successfully launched a radical innovation, this same organization will usually seek to sustain market dominance by also engaging in incremental innovations. An example is provided by Microsoft, which having radically altered the approach to the provision of computer software for PCs, has subsequently sought to retain market leadership through successive releases of the new Windows operating systems and the firm’s suite of Office software products.

Playbook Guideline 4: High-risk radical innovation offers the reward of much greater financial return

Retaining Leadership in the Innovation Stakes

Case Aims: To illustrate that technological innovation demands a long-term commitment to retaining market leadership through superior capability

In the 1920s, Henry Ford revolutionized the car industry by introducing production processes, which he observed in Chicago meat packing plants. His new approach was so successful that a new, rapidly accepted industry convention was established; namely to be successful, a high-volume car manufacturer must be capable of utilizing mass production manufacturing to supply customers with a low-cost, standard product.

Although before World War II some car manufacturers engaged in innovation, this tended to be of an incremental nature, leading to product improvements such as automatic gearboxes, power steering, and hydraulic brakes. Following the end of World War II, price continued to be the critical factor influencing the purchase decision of the average customer. This had the implication that successful firms needed to maximize manufacturing productivity. Less effort was allocated to involvement in innovation. Instead, the primary focus was that of achieving economies of scale. This was usually delivered through industrial mergers between domestic producers, eventually leading to only one or two firms dominating each Western World home markets (e.g., Ford, General Motors in the United States; British Leyland, subsequently Rover Group, in the UK, Volkswagen in Germany; Fiat in Italy, Renault; and Citroen in France) (Helper and Henderson 2014).

The OPEC oil crisis in the 1970s sparked higher customer interest in fuel economy, offering both European and Japanese producers the opportunity to break into the largest car market in the world, the United States. While the U.S. car makers were struggling with the problems of learning how to make smaller cars and manage in what had become a highly unionized production environment, the Japanese were left to experiment with concepts such as robotics, just in time (JIT) to further enhance productivity and total quality management (TQM) to improve “‘build quality.” Their success permitted them to become global players in the world car market. Many of the Japanese’s advances in manufacturing, which took firms such as Toyota and Honda to market leadership, were often achieved by being willing to challenge industrial conventions established by the major Western manufacturers (Townsend and Calantone 2014).

Long lead times can exist between concept identification, completion of fundamental research, and the ability to launch a new product based on a new technology. An example of being prepared to invest in the acquisition of new knowledge and internal capabilities is provided by Toyota. Long before the American or European car manufacturers exhibited any concerns over rising oil prices, Toyota, as the world’s leading automobile manufacturer, had the strategic insight to research how to move vehicle transportation away from a dependence on hydrocarbons to utilize other types of fuels. Their first product was the highly successful hybrid the Toyota Prius. Having launched the Prius, the company has focused on continuous innovation to improve this vehicle and to expand the company’s hybrid product line (Rapp 2007).

The expected next alternative to cars using petrol is the fuel– cell vehicle, or FCV. These vehicles run on electricity generated by combining hydrogen with oxygen, with only water vapor being the byproduct. Two major constraints, similar to the initial hurdle facing electric cars, are the high development costs and the lack of refuelling infrastructure. Toyota’s solution has been to offer its fuel cell components and FCV patents and patents for the installation and operation of hydrogen fuelling stations to others companies free of charge until 2020. Although the move risks Toyota compromising its technological leadership in the FCV technology, the decision is perceived as less important than the need to stimulate an industry-wide effort to rapidly expand the infrastructure required to achieve rapid market penetration for the new technology. Toyota’s decision comes ahead of the launch of its new fuel–cell sedan, the hydrogen-powered Mirai, in the United States and Europe in 2015 (Muller 2015).

Playbook Guideline 5: Staying ahead requires an ongoing commitment to engaging in radical and incremental innovation

Entrepreneurship

French economist Jean-Baptiste Say is credited with inventing the term “entrepreneurship” in the early 19th century. At the time, the concept was not seen as important by mainstream economists (Dorobaţ 2014). It would not be until the 1920s that the A...

Table of contents

• Cover
• Title
• Copyright
• Preface
• Chapter 1. Technology: The Wealth Generator
• Chapter 2. Technological Entrepreneurs
• Chapter 3. Leaders and Structure
• Chapter 4. Opportunity Emergence and Evolution
• Chapter 5. The Macroenvironment
• Chapter 6. Competence
• Chapter 7. Strategizing
• Chapter 8. Managing Process
• Chapter 9. New Knowledge Acquisition
• Chapter 10. The Service Sector
• Chapter 11. Health Care
• Chapter 12. Emerging Futures
• References
• Index