According to the Oxford dictionary entrepreneurship is “theactivity of setting up a business or businesses, taking on financial risks inthe hope of profit” Over half of new start up businesses don’t make it pastyear 5. This is a damning statistic but it poses some important questions, whatseparates those businesses that fail with those that succeed; what implicationsdoes innovation have on the economy? Many theorists and thinkers have had theirsay, in particular Schumpeter, who by in large agreed with the statement inquestion, that innovation is central to entrepreneurship. In this essay I willdiscuss this as well as compare Schumpeter’s theory to other importantentrepreneurial theories. Schumpeter’s idea of an entrepreneur largely agrees with thestatement in question. Schumpeter stressed the idea of the entrepreneur as aninnovator who forces change in an economy by introducing new goods or newmethods of production. This idea hinges around the rather simple idea that ifan entrepreneur can create a method of production or create a new or improvedproduct, the consumer will choose their service rather than one of an existingcompetitor in the market.
This can be further shown by Schumpeter’s theory ofcreative destruction whereby he states that the introduction of new productskills off other existing products which, in turn, leads to economic growth bydisrupting the circular flow of the business cycle; it will also create newjobs that didn’t exist before. This reinforces the statement of Innovationbeing central to entrepreneurship as it shows that new ideas can effectivelykill off other products in the market, even if they are well establishedalready, therefore in turn making the existing product in the market obsolete.There are many examples of this, especially with the presence of moderntechnology, making “old fashioned” products and methods outdated and thus,eventually extinct. One, very famous example would be Amazon.
Amazon completelychanged the way books are read by introducing electronic reading with theAmazon Kindle, released in 2007. Since then Amazon has completely dominated thebooks market, boasting a 41% market share of all new book unit purchases, thisis because consumers have discovered that the Amazon Kindle offers a cheaperand more convenient service meaning many traditional Brick and Mortarbookstores have become obsolete, over 2,000 independent bookstores have beenkilled off due to Amazon and this goes a long way in backing up Schumpeter’screative destruction theory, in that Innovation is the main contributor to entrepreneurialsuccess. This also links to the theory of first mover advantage, which statesthe first business to move into a market will benefit by being able toestablish a loyal customer base before other businesses follow suit, thisfurther reinforces Schumpeter’s point and shows how innovation is central tooverall business success. Having said this, other theorists, have come up with their ownideas in regards to entrepreneurship. One example of this would be Liebensteinwith his X-efficiency theory. Essentially Liebenstein concentrates onefficiency, claiming that other people’s lack of effort, and the consequentinefficiency of the organisations that employ them, create opportunities forentrepreneurs.
According to Liebenstein the process of improving efficiency iscalled “input completion” and he believed this to be the main role of theentrepreneur. Input completion can be achieved in many ways. One way to improveefficiency in a firm would be to increase output of workers, and the obviousway to do this would be by motivating them more.
Motivating employees can beachieved by paying employees more, empowering employees or by giving thembetter working conditions. Analysing Liebenstein’s theory in more depthmotivation could be seen as vital as Liebenstein has a theory Y view of humanmotivation, referring to Douglas McGregor’s theory x and theory y theory,Liebenstein believes that the employee works for himself rather than for theemployer. Therefore, the employee must be motivated otherwise they will becomelazy and disinterested which would lead to high degrees of inefficiency. Highlymotivated employees are imperative to entrepreneurship as businesses will beable to benefit from higher productivity as a result which in turn will helpreduce unit cost, this would help improve profit margins which in the long termwould improve profits and cash flow position. This is particularly importantfor small businesses and those who face a lot of competition as they will beable to be more competitive by being more flexible with pricing due to lowerprofit margins. Moreover, higher profits will allow them to reinvest more moneyinto different areas of the business, such as innovation.
An example of a businessthat is very efficient is Best Buy who use a “results only work environment”and as a result have been able to reach very high levels of productivity.Therefore efficiency can be seen as the key to entrepreneurship. My view isthat although Liebenstein is correct on in saying that efficiency is vital tooperations, he doesn’t mention that innovation can actually help improveefficiency. This can be seen with Ford, in particular with famous entrepreneurHenry Ford, who invented the production line which dramatically improvedefficiency allowing Ford to produce cars at a much lower unit cost than therest of the market. Another example would be Google who used innovation tocreate a unique working environment in order to increase creative thinking.
Thisgoes to show that innovation is in fact central to entrepreneurship as it isthe fulcrum to so many different departments. Another factor that is central to entrepreneurship is thequality of service provided. The theorists Andrews and Penrose believed inthis.
Andrews believed that an oligopoly within a market is natural, and thatcompetition within the industry maintains a fairly uniform price. What dividesthe firms is the loyalty of customers to a brand, and in order to achieve brandloyalty, quality of service is imperative. Quality of service is indispensible accordingto this theory as quality of service will in turn lead to an improved brandimage and reputation which will in turn lead to increased repeat sales ascustomers will be inclined to use the service or product again, this wouldeventually lead to increased revenue and an improved cash flow position whichwould result in keeping the business stable. This idea of quality being centralto entrepreneurship is even more important in a competitive market where thereis a lot of competition meaning that there is even more pressure on businessesto retain customers. An example of a business that operates based on thistheory would be John Lewis.
John Lewis have always prided themselves on havinga high level of customer service and it’s largely because of that that theyhave been able to survive despite the likes of e-commerce giants such as Amazonand Ebay also moving into their market. Another example of this is the companyRicher sounds who like John Lewis have succeeded in a competitive market due tohaving a high quality product alongside high quality customer service. Thisfurther goes to prove Andrews’ point that quality of service is actuallycentral for entrepreneurship. Andrews’ idea challenges Schumpeter’s theory and thatinnovation isn’t central to entrepreneurship, quality of service is. Afterconsideration I side with Schumpeter because what Andrews fails to point out inhis work is that innovation can actually add to the quality of service. Forexample Amazon warehouses were seen as an innovative step, using technology androbots in order to speed up delivery and allowing for next day, consistent,delivery.
Going back to innovation, its true to say that, manyentrepreneurs can see innovation as having high opportunity cost. The reasoningfor this is because innovation can seem like a lot of money invested for notmuch immediate gain especially as the number of products that are actuallysuccessful is very low. Not investing in innovation is especially apparent withnew more inexperienced entrepreneurs who don’t plan for the long term andsolely focus on short term gains.
This is where a lot of entrepreneurs go wrongand maybe why more than half of start-up enterprises don’t make it past thefirst five years. Moreover in times of economic uncertainty when businessesbegin to retrench, innovation is normally the aspect of the business that getscut as businesses try to ride the storm. However it could be argued that, for somecompanies, economic crisis can actually provide an innovation platform. PaulSchoemaker, research director for the Mack Centre for Technological Innovationsuggested this, he stated “”Loss of revenue and profit will at first instil acost cutting mentality, which is not good for innovation.
But if the patient isbleeding you need to stop that first. Then, however, a phase starts whereleaders ask which parts of their business model are weak (and perhapsunsustainable) and that, in turn, can lead to restructuring and reinvention.”He also insists that businesses shouldn’t just incrementally innovate, theyshould disruptively innovate, referring to the little i and big I ofinnovation, he thinks that companies should make more daring, big I,innovations which disruptively innovate the market, this comes fromSchumpeter’s creative destruction theory of the entrepreneur and further goesto show the constant importance of innovation, no matter what the economicclimate. The can be further summarised by Apple who are consistently thehighest spenders when it comes to innovation in order to stay ahead of thegame. However for a large company like Apple this is not too strenuous on theirseemingly endless resources. It’s for smaller companies where innovation is vital,it is vital that entrepreneurs continue to innovate and disrupt the market. Furthermore it’s true to say that the extent to whichinnovation is central to entrepreneurship depends on the business.
Infast-changing markets such as consumer electronics the need to bring out newproducts is very strong. Perhaps unsurprisingly one of the biggest sectors forinnovative spending is the pharmaceutical industry; to succeed in this marketfirms are constantly striving to develop medicine which they can patent. Thefirm that develops a cure to the common cold or Alzheimer’s will make a fortune;therefore, for a pharmaceutical company, it is well worth investing in researchand development.
In a more protected market, where the rate of change isslower, the need to innovate may not be so great. For example, a recruitmentagency may not spend so much on innovation. However, the fact that somebusinesses don’t have to concentrate so much on innovation doesn’t mean theyshould totally neglect it, according to Schumpeter creative destruction canoccur in any market and even in a sheltered market, innovation can be thedifference, making it still central to entrepreneurship. To conclude, going back to innovation, it is easy to thinkthat innovation is just the creation of a new product or service; however, itis so much more than that.
In fact Schumpeter stated that there are five typesof innovation. One being the introduction of a new product; two being a newmethod of production which is unproven; three being the opening up of a newmarket to the products already produced in the economy concerned; four beingthe opening up or conquest of a new source of raw materials or partmanufactures goods and five being the carrying out of a new organisation ofindustry, for example, creating or destroying a monopoly condition. All thesetypes of innovation can help other aspects of the business, as I’ve alreadyalluded to. Whether it’s incremental innovation or creative destruction,innovation is still the primary reason why some businesses succeed and some don’t.
This is why the statement is true andinnovation can be seen as the key to business success. “Innovation is the onlyway to win” Steve Jobs.