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Chapter 14
Innovation and Entrepreneurship
Chapter Summary
A central goal with any strategy is the survival, growth, and improved competitive position of the
company in the future. Breakthrough innovation involves far more risk than the incremental
Learning Objectives
1. Summarize the difference between incremental and breakthrough innovation.
2. Explain what is meant by continuous improvement and how it contributes to incremental
innovation.
Lecture Outline
I. What is Innovation?
A. A recent study by the Boston Consulting Group of large global companies
1. The average increase in spending was reported to be 15 percent over the previous
2. The other interesting finding in the study was that fewer than half of these
a) These executives indicated their three biggest problems with innovation
were:
(1) Moving quickly from the idea generation to initial sales.
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b) Yet these executives were anxious to become more innovative.
3. Invention is the creation of new products or processes through the development of
4. Innovation is the initial commercialization of invention by producing and selling
5. Apple’s iPod was a product innovation that applied Apple’s chip storage
a) Steve Jobs then worked intensely for almost two years negotiating digital
b) Starbucks added the simple service of wireless access free to its customers at
6. While these two leading innovators are creating profitable product and service
7. To some business managers, innovation seems as predictable as a rainbow and as
manageable as a butterfly.
a) For those managers who try to manage innovation, it is important to
B. Incremental Innovation
1. Incremental innovation refers to simple changes or adjustments in existing
products, services, or processes.
a) There is growing evidence that companies seeking to increase the payoff
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2. Continuous improvement, what in Japanese is called kaizen, is the process of
a) This approach, or really an operating philosophy, seeks to always find slight
3. Toyota’s extraordinary success the last five years is one good example of a cost–
oriented continuous improvement effort (see Exhibit 14.1, Top Global
Strategist).
a) Named CCC21 (construction of cost competitiveness for the 21st century),
b) The result: a stunning $10 billion in cost savings over the past five years in
c) Taking the Japanese perspective, 1001 small innovations or improvements
4. Six Sigma is another continuous improvement approach many companies have
adopted to spur incremental innovation in their businesses.
a) Six Sigma is a rigorous and analytical approach to quality and continuous
b) Six Sigma complements TQM philosophies such as management leadership,
5. Many frameworks, management philosophies, and specific statistical tools exist
a) One such method for improving a system for existing processes falling below
6. Incremental innovation via continuous improvement programs is viewed by most
proponents as virtually a new organizational culture and way of thinking.
a) It is build around an intense focus on customer satisfaction; on accurate
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b) One useful explanation of the continuous improvement philosophy suggests
10 essential elements that lead to meaningful incremental innovation:
(1) Define quality and customer value.
(a) Rather than be left to individual interpretation, company personnel
should have a clear definition of what quality means in the job,
department, and throughout the company.
(2) Develop a customer orientation.
(a) Customer value is what the customer says it is.
(b) Don’t rely on secondary information—talk to your customers
directly.
expectations.
(3) Focus on the company’s business processes.
(a) Break down every minute step in the process of providing the
company’s product or service, and look at ways to improve it,
improve.
(4) Develop customer and supplier partnerships.
(a) Organizations have a destructive tendency to view suppliers and
even customers adversarily.
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(5) Take a preventive approach.
(a) Many organizations reward “fire fighters” not “fire preventers”
(b) Management, instead, should be rewarded for being prevention
(6) Adopt an error-free attitude.
(a) Instill an attitude that “good enough” is not good enough anymore.
(b) “Error free’ should become each individual’s performance
imperative.
(7) Get the facts first.
(a) Continuous improvement-oriented companies make decisions
based on facts, not on opinions.
(8) Encourage every manager and employee to participate.
(a) Employee participation, empowerment, participative decision
(9) Create an atmosphere of total involvement.
(a) Quality management cannot be the job of a few managers or of one
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(10) Strive for continuous improvement.
(a) Quality, efficiency, and responsiveness are not one-time programs
of competitive response, because they create a new standard to
measure up to.
C. Breakthrough Innovation
1. A breakthrough innovation, then, is an innovation in a product, process,
2. Breakthrough innovations, also called “disruptive,” often shake up the industries
3. Breakthrough approaches to innovation are inherently more risky than incremental
innovation approaches.
a) The reason can be seen in Exhibit 14.3, From Idea to Profitable Reality,
b) Their conclusion is that firm committed to breakthrough innovation must first
c) The second is to set next-to-impossible goals for those involved.
D. Risks Associated with Innovation
1. Innovation involves creating something that doesn’t now exist.
a) It may be a minor creation or something monumental. In either case, there is
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2. A recent study of 197 product innovations, 111 of which were successes and 86
failures, sought to compare the two groups in order to see what might explain
differences between innovation success and innovation failure.
a) They first sought to examine what was common to successful innovations
(1) Moderately new to the marketplace.
3. In contrast, product innovations that failed were based on cutting-edge or untested
examination of what they called “idea factors.”
a) Idea factors were concerned with how the idea for the innovation originated.
b) They identified six idea factors:
(1) Need spotting—actively looking for an answer to a known problem.
5. The researchers then compared the “success–to–failure” ratio of these six idea
factors to see which idea factors were more often associated with success or
failure of the related innovation.
a) The two most failure-prone factors were trend following and mental
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6. Inherent in their analysis is the presence of two key risks associated with
innovation—market risk and technology risks.
a) Market risks come from uncertainty with regard to the presence of a market,
b) Technology risks derive from uncertainty about how the technology will
7. Research by Michael Treacy of GEN3 Partners and reported in the Harvard
with innovation.
a) Exhibit 14.4, Risks Associated with Innovation, provides a visual portrayal
of this research.
or process innovations.
8. The point that emerges from this graph is that breakthrough innovation, while
glamorous and exciting, is very risky compared with incremental innovation.
a) Breakthrough innovations, according to Treacy’s examination of much of the
b) He makes several useful points about managing the resulting risks:
(1) Remember, the point of innovation is growth.
(2) Get the most out of minimum innovation.
9. The case for incremental innovation as a less risky approach than breakthrough
innovation is widely advocated.
a) Clayton Christensen offers a word of caution in this regard, arguing that as
b) Nor do they guarantee survival.
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c) He argues that while disruptive (breakthrough) innovations may
underperforms established product in mainstream markets, they often offer