UNC Kenan-Flagler Insights

Insights into Innovation: Innovation v. Entrepreneurship

April 19, 2013 By kfblogadmin1
innovation1Atul Nerkar is associate dean of UNC Kenan-Flagler’s Executive MBA programs. He is also professor of strategy and entrepreneurship. Below, read his Insight into Innovation, the third in a five-part servies. Previous posts touched on the importance of failing fast and often and detailed why organizations must innovate.

Why is it important for an organization to master innovation?

We live in a world in which innovation is the buzzword. Everywhere you look, innovation is a buzzword. Why is innovation important? Most will come up with an answer like, “It’s important for competitor advantage,” or “We get stale, we get inert,” or “It’s good for society.” All those reasons are valid.

I think the most important reason why innovation is important is because it’s connected to what I call “profits” and “value creation” –  profits for private sector of nations and value creation for “not for profits”. I want to make a fairly controversial comment here. In general, for what I call “private companies,” these companies, generally, they’re looking for profits. There’s only one way to make money… in the market where there is demand for your products and so on, there’s one way to make money, and that’s to be a monopoly. However, there are two ways to being a monopoly.

One way to being a monopoly is to control scarce resources like oil or gas or gold. One of the advantages of having scarce resources is that you can drive up the prices and make money. These sorts of monopolies tend to die out over time. If you are a monopoly which lives on a scarce resource, you’re going to soon die out or your profit structure’s going to collapse.

The second way to being a monopoly is actually by being innovative. If you say “innovative,” by definition you are going to be first in some market or in a process or a product. If you are first in a market, product or process, and that process, product or market is value-creating, you are, by definition, a monopoly. If you are a monopoly, then you can actually charge a lot more and people actually buy it because they can’t get it anywhere else. You are doing it out of your own ability. Really, it’s sort of a correct thing.

I think innovation is at the heart of most companies and individuals because it can create value, and value can gather profits or societal value. That’s why innovation’s important.

Can you explain how an organization can look at their R&D process if they’re trying to create a monopoly around some type of innovation? If they have that mindset, how does that change how an R&D team mixes in with that opportunity?

Again, part of it is that we live in a pro-innovation world. If you ask anyone right from elementary school or high school, “Is innovation important?”, they’ll all say, “I want to be innovative.” We live in this world which has got a lot of pro-innovation bias. That said, by definition not all innovations create value. Therefore, your question is like, “When you think about the R&D engine, is it creating innovation which creates value?” Now all R&D doesn’t lead to value creation. There lies the dilemma. How do you structure R&D to create value-creating innovations? The answer to that is far more subtle, nuanced and textured. There are some broad principles that one can think of.

atul_nerkar_865_p57At the heart of innovation is uncertainty. If you are going to be managing uncertain processes, then you need to be able to ensure that your risk-reward ratios are appropriate. Maybe a company that actually believes that they, by spending more on R&D, are going to be able to guarantee more in terms of innovations, and, therefore, more in profits, but that doesn’t work out necessarily. It’s not just about throwing money at R&D. It’s about how well you manage that portfolio of R&D.

Some of the most successful companies have been able to get more out of R&D are not the ones that are putting it all into one bucket or creating mega-projects. (There are times when you want to create mega-projects and so on.) These are the companies, where I actually know that value creation happens, through portfolio management of these resources. Where do you invest to give you long-term return? How does one put the portfolio together? Those are some of the issues that I look at in my research. It’s about ensuring that you do not put all your eggs in one basket. Invest in projects and cut loose if you think that you know there are going to be losses.

An important aspect of not having to put all your eggs in one basket is the size of your organization. At what point should an organization stop being focused on its one innovative success, and when should it start diversifying its portfolio and focus on various collections of product innovations?

I think the answer to this is, again, context-specific. In some industries, you have a pace of change that is very rapid. For example, in the technologies or World Wide Web space or the apps space in the case of tablets, you had to be innovating literally every month, every minute. Whatever you do is going to get obsolete very quickly. If you’re a startup, it doesn’t matter.  If you’re Microsoft, it doesn’t matter.  You still have to innovate.

Microsoft just launched its new tablet. In the history of Microsoft, they’d never done a physical product ever before. They’re doing it now because they believe that they have to. Going back to your question, “Is there a right time to become innovative?”…No, I think you need to be continuously innovative all the time, because the day you put out the innovation, the next day that innovation can become obsolete. Someone else is going to pick it up and imitate it.

 

You talked about “chasing the value” or “chasing the profit” and how resources are one type of monopoly, being innovative is the second, which sounds very product or service-oriented. It’s what you’re selling. Have you come across examples where not everyone has the luxury of being some type of new limited resource or having some type of natural resource that’s limited just because there’s only so much of it? They focus on their innovation on how they run their business. Is that another way that firms can take innovation?

 
Lots of innovations are very critical. I think when you think about process innovations, I think they are really true in the energy sector. I say “energy sector” because if you look at gas and oil and so on. These have been there for more than a century now, and they have been helping our energy. The end product has had incremental changes to reduce hardly any innovation happening on that I suspect. They are old matter energy resources. In terms of gas itself, I mean petrol-gas-oil, the same story. However, there have been huge process innovations in the way they drill for gas or the way they’ve been able to keep the valves alive.

To go back in the 1970s, this is a sector where people said that, “You know we will be running out of gas by the year 2000. There’ll be world-wide crisis and so on.” We have not had world-wide crisis in this context because of process innovations, huge process improvements and process efficiencies which have come about in the energy sector. Those have driven alot of value creation in society.

Do organizations always have this drive towards innovation or is this something that you can start getting the team to think about and transition towards: “We need to become innovative to survive?”

 

In fact, the normal state of organizations/all human beings is just to be inert. We like to settle into our comfort zone and not change. All innovation requires change, but not all change requires innovation. Alot of people think, “I’m changing” but are you changing in a manner which is going to create value for the organization?

I think the default status is not to be innovative for most organizations. I think you need to create the drive. You need to create the urge to be innovative in organizations. That’s one of the primary reasons why this is still a very hard topic and will remain a hard topic forever.

 

You may have an advantage given that your education is split between two countries and two cultures. Do you see innovation being approached the same way cross-culturally? Do some countries just have a more innovative drive programmed into them?

 No, here’s something which I do want to distinguish between. I think there is one concept which is what I call “innovation” and there is another which I will call “entrepreneurship”. I think it’s important to make that distinction. There are a large number of companies and countries, which could be innovative, but not necessarily entrepreneurial. “Entrepreneurial” means “being able to make that next leap and commercialize it or bring that value to the organization or society.”

My favorite example is always Steve Jobs. Alot of people believe that he was innovative. To some extent yes, of course, he was innovative, but he was largely entrepreneurial. He picked up innovation from all over. It didn’t matter if this was inside Apple or outside Apple.

Going back to your question about societies, I think the innovative potential is pretty much the same across … It’s not that some societies are more blessed with those skills. What they do with those skills is more important. I think that’s what I call “the entrepreneurial bent-of-mind”. Some of the Asian societies might be innovative, but they don’t know what to do with those innovations sometimes. The United States of America, for example, is far more entrepreneurial. A large number of companies are started around innovations, because individuals here want to take those innovations and commercialize them, while in many parts of the world, you will not see that happen. 

One of the things I always tell people is, “If you look at some of the biggest brand names, some of the products and so on they have have been commercialized in the United States, though they may be manufactured somewhere else.  The technology behind it, which is basically how you make those things, can happen anywhere in the world. How you commercialize it generally happens in the US.” There are societies which are better at entrepreneurship and some which are not as good. Again, those reasons go back to institutional structures, training, education and so on.

I appreciate your distinguishing between “entrepreneurship” and “innovation.”Do you have any closing thoughts or anything you really want to emphasize in closing?

I think I always talk about these three things: technology, innovation, and entrepreneurship. I ask people, “What would you like to be? Would you like to be a technology person who is basically everyday going and punching in a tower and doing something routine? Do you want to be the person who goes out and does something different every day? Do you want to be the person who not only does the technology but also does the innovation and also makes money on it?” Now the answer is, of course, obvious. People say, “I want to make money, and I want to create value.”

I think part of it is that, if you want innovations to be value-creating for society and  for the firm that you own/work for, then you really want to be entrepreneurially innovative. I also think you have the source innovation not just within the organization. You have the source innovation from anywhere in the world. I think a large number of organizations get into this “not-invented-here syndrome” where they say, “If I didn’t invent it, I don’t want to do it.”

The best entrepreneurs or entrepreneurial-innovators are the ones who don’t care where the innovation happens. They want to bring it to life. One last part I would say is that, “How can you make these things come to life?” Our program is built on the fact that we want to create value for organizations and society.