creative destruction, disruptive innovation and economic progress inside and outside the firm 1 bus...
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EntrepreneurshipIn The Economy
Creative Destruction, Disruptive Innovation and Economic Progress
Inside and Outside the Firm
BUS 310: EntrepreneurshipDouglas A. Yount, MPPCalifornia State University, Monterey Bay School of Business
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Economic and Social Importance of Entrepreneurship
Entrepreneurship and Economic Progress Market Evolution Entrepreneurship Inside The Firm
Agenda for the Day
“We will find it impossible to comprehend, shape, adapt to, and in turn be shaped by an unfolding, evolving reality that is uncertain, ever changing and unpredictable.“
- John Boyd, fighter pilot
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Venture PitchesSetting the Stage
Research your venture Create a one-minute pitch about the
venture including◦ Who are its customers?◦ What is its value proposition?◦ How does it make money?◦ How did it get started?◦ What makes it unique in the marketplace?
New Venture Pitch
No PowerPoints Note cards ok, but don’t “read” them to us! Convey passion – engage us! One Minute!
New Venture Pitch - Rules
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Take notes: we’ll be using these ventures as examples
You’ll have one minute for clarifying questions
New Venture Pitches – Audience Role
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“Pitchers” On Deck…Week 2Tuesday Thursday
Rafaela Blake Rewen Sanghoon Abel Robyn Cinthia Natalie Bianca Aram
Reyna Erik Lucia Thys Jose Farheen Kathyrn Eugene Mike Sarah Ryan Rey
Section 2
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“Pitchers” On Deck…Week 2Tuesday Thursday
Danny Ordaz Allison Nicholas Richard Andre Vetle Vanessa
James Andrew Janely Shelby Danny Mares Sean Adan Lewis
Section 1
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The Economic and Social
Importanceof Entrepreneurship
“The best way to predict the future
is to invent it.”- Alan Kay
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Invention vs. Innovation Gazelles Perfect Competition Creative Destruction
(Schumpeterian Competition)
Radical Innovations Sustaining or Incremental
Innovations
Moore’s Law Value Proposition
Terms and Concepts to Know
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Innovation◦ Small entrepreneurial firms are responsible for
over two-thirds of all innovations in the U.S. Job Creation
◦ In the past two decades, economic activity has moved in the direction of smaller entrepreneurial firms, which may be due to their unique ability to innovate and focus on specialized tasks.
The Economic Impact of Entrepreneurial Firms
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Gazelles is a term coined by Professor David Burch at MIT
Characterized by ◦ High growth ◦ Innovation ◦ Leadership◦ Creativity (launch markets that didn’t exist before
OR bring new business model to existing industry)
Job Creation Impacts: Gazelles
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Decker et al (2014)◦ Startups account for 20% of U.S. job creation◦ High-growth businesses account for 50% of U.S.
job creation
Job Creation Impacts
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What products that didn’t exist 25 years
ago are now an integral part of your
life?
Impact on Society◦ The innovations of entrepreneurial firms have a
dramatic impact on society.◦ Think of all the new products and services that
make our lives easier, enhance our productivity at school and work, improve our health, and entertain us in new ways.
Impact on Larger Firms◦ Many entrepreneurial firms have built their entire
business models around producing products and services that help larger firms become more efficient and effective.
Entrepreneurial Impact
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Entrepreneurshipand
Failure
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Failure rates Macroeconomic outcomes of success and
failure◦ The entrepreneur rolls the dice, the economy wins
Microeconomic outcomes of success and failure◦ The expected value of being an entrepreneur
Success and Failure: The Micro and Macro Stories
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Entrepreneurship and Economic Progress
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Competition as we learned it in microeconomics
Recall “perfect competition”
How did one firm compete with
another?What was the
outcome (under perfect
competition)?
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Discussion of “Creative Destruction”
In Groups, develop answers to the following
questions:How is competition as
described by Schumpeter different than the price
competition addressed in microeconomics?
What is the role of the entrepreneur in
Schumpeter’s model of creative destruction?
Are your examples of new business
ideas good examples of Creative
Destruction?
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The process by which the new supplants the old Attributed to Joseph Schumpeter Much more important in creating economic
progress than price competition◦ Moore’s Law, not price competition, has lowered the
cost of computing
Creative Destruction
Economic Growth in an Industry
Incremental growth comes through secondary sources (external to the industry)◦ population increases◦ growth in other industries
Discontinuous (dynamic) growth comes through innovation (internal to the industry)◦ Significant product innovation◦ Significant process (production) innovation
From Schumpeter (1928), “The Instability of Capitalism”
What are some examples of industries that are growing
incrementally? Dynamically?
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Prior to Uber/Lyft◦ Was the taxi industry growing or shrinking?◦ Where do “new” taxi customers come from?
Uber and Lyft have been growing dynamically◦ Where do their customers come from?◦ What is the value proposition for Uber/Lyft? How
is it different from the value proposition for taxis?
Example: Taxis and Uber/Lyft
Innovation “It is not the knowledge that matters, but the
successful solution of the task … of putting an untried method into practice—there may be, and often is, no scientific novelty involved at all, and even if it be involved, this does not make any difference to the nature of the process.”
“It is a feat not of intellect, but of will. It is a special case of the social phenomenon of leadership.”
From Schumpeter (1928), “The Instability of Capitalism”
Innovation and the Entrepreneur “Differences in aptitude for the routine work of
“static” management only result in differences of success in doing what every one does.”
Differences in [entrepreneurial] aptitude result in some being able to do what others cannot at all.
To overcome these difficulties [of] change of practice is the function characteristic of the entrepreneur.”
From Schumpeter (1928), “The Instability of Capitalism”
That is, the function of the entrepreneur is to create change in the
marketplace
Entrepreneurship and Wealth The “entrepreneur’s gain” is the reward that
accrues to accomplishing the task of innovation
“It is this entrepreneur’s profit which is the primary source of industrial fortunes, the history of every one of which consists of, or leads back to, successful acts of innovation.”
This is “an essentially temporary gain,” and is eliminated by the working of the competitive mechanism
From Schumpeter (1928), “The Instability of Capitalism”
Zero ProfitsCreatesImitative
Competition
Leads To
Innovation and Competition
Entrepreneurial ProfitsCreatesInnovation
Entrepreneurship and Capital “Innovation, being discontinuous and
involving considerable change and … embodied in new firms, requires large expenditure previous to the emergence of any revenue; credit becomes an essential element of the process.”
From Schumpeter (1928), “The Instability of Capitalism”
In today’s terms, availability of
investment capital is essential
Innovation, Entrepreneurship and Social Progress If, as has been argued
◦ Progress fundamentally consists in this innovative process
◦ The entrepreneur’s function is to act as the propelling force of the process
◦ Entrepreneurial profits, credit, and the business cycle are essential parts of the mechanism
Then economic expansion is the consequence of innovation and entrepreneurship
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Entrepreneurship Is Fundamental To Capitalism
“The fundamental impulse that sets and keeps the capitalist engine in
motion comes from the new consumers’ goods, the new methods of production or transportation, the
new markets, the new forms of industrial organization that capitalist
enterprise creates.” (Schumpeter 1942)
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Entrepreneurship and the Process of Market Evolution
Radical (disruptive)and
Incremental (sustaining) Innovations
From Thomas Edison to Steve Jobs:
Recorded Music Evolving
Competition as Creative Destruction: Radical and Incremental Innovations
Key Attributes in the Evolution of Recorded Music Sound quality Portability Recordability Permanence
Two Types of Innovation
Radical InnovationIntroduces a disruptive new
technology
Incremental Innovation
Improves on and accessorizes existing technology
Radical Innovation:The Evolution of General Formats
The LP: 33 rpm
Digitally MasteredLPs
Incremental Innovation in Records
Wax rolls
The “78”
Incremental Innovation inTape Recording
Cassette Players
Reel-to-Reel Tape
Wire Recorders
The 8-Track Player
Incremental and Radical Innovation in Portable Music
Sony’s MiniDisc
The iPod
MP3 Players
The Discman
The Walkman
Transistor Radios
Both radical and incremental innovations present opportunities for
profitable innovation
But an iPod does not need a better
phonograph needle – late incremental innovations
will be trumped by radical innovations
Opportunities for Entrepreneurship
Consider the following products…
Fax machines Personal
computers Cell phones Online
Encyclopedias
These are far more than just new products…
They represent entire new usage systems and
they revolutionized market and competitive
structures
These Are Different…
Radical/DisruptiveInnovations
Incremental/SustainingInnovations
Create New Usage
Systems
Enhance Current Usage
Systems
Low Buyer Familiarity
High Buyer Familiarity
Benefits Frequently Are
Not Clear
Benefits Are Clear
Market To Mainstream
Buyers
Market To Innovators/
Early Adopters
Customer “Usage Systems”
Any product is used in combination with other products and services to perform some function for a customer
This network of products and services forms a “usage system”
Pen and Ink and Paper
iPods and Internet
ComputersSoftwarePrintersMonitors Cars and
Gas Stations
Customer Needs
It is in the context of a usage system that customer “needs” arise
Customers choose products that optimize their usage system
This applies for incremental
innovations, but radical innovations need to create a new usage
system
Evolving Usage Systems
RadicalInnovations
IncrementalInnovations
Create New Usage Systems
Enhance Current Usage
SystemsBenefits Don’t
Apply to Current Users
Benefits Apply to Current
UsersMarket Based
on Differentiation
Market Based on New
Capabilities
Bag Phone to iPhone
Both are cellular phones – but how do the usage
systems differ?
Apple’s Newton: Failed Radical Innovation?
Unfamiliar application of technology
Poor handwriting recognition (became the stuff of legend)
Overlarge form factor Inadequate batteries (3-AAA) High price ($1000) “Scope creep” But it gave rise to PDA’s
and eventually today’s smart phone
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Was the VCR (videocassette recorder) a radical or incremental innovation?◦ What did it change?
What about the DVD player? Streaming video?
VCR’s
What user and market changes has
each of these caused?
MIB
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Both incremental innovation and radical innovation create new venture opportunities
Incremental innovations enhance current markets by improving current offerings and creating new related offerings◦ Examples: accessories for iPhones; apps for
iPhones Radical innovations create new markets
with new value propositions◦ Examples: iPad; iPhone. iPod?
New Venture Opportunities
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“Creative Destruction” is the process by which market economies progress
The entrepreneur’s role is to drive the creative destruction process
Innovations may be incremental or disruptive
Incremental innovations enhance current usage systems in existing markets
Radical innovations create new usage systems and new markets
Summary
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Entrepreneurship in the Firm
The Creative Function
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Entrepreneurship as a Role in the Firm
LaborDoes the work
ManagementOrganizes the
work
EntrepreneurshipCreates new work
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The essence of entrepreneurial behavior is identifying opportunities and putting useful ideas into practice.
The set of tasks called for by this behavior can be accomplished by either an individual or a group and typically requires creativity, drive, and a willingness to take risks.
What is Entrepreneurship?
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Key Elements of Entrepreneurship
Taking Risks
Creating What Wasn’t There Before
(Imagination)
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If we look at entrepreneurship as the commercialization of innovations
Then entrepreneurship takes many forms◦ Individual entrepreneurship◦ Corporate entrepreneurship◦ Intrapreneurship◦ Social entrepreneurship
Entrepreneurship is not just starting a business…
Corporate Entrepreneurship◦ We can think of companies as being
entrepreneurial – or not – in their strategy and execution
◦ All firms fall along a conceptual continuum that ranges from highly conservative to highly entrepreneurial.
Corporate Entrepreneurship
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Corporate Entrepreneurship
Entrepreneurial Firms Conservative Firms
• Proactive• Innovative• Risk taking
• Take a more “wait and see” posture • Less innovative• Risk averse
Examples?
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Intrapreneurs create something new within an existing firm rather than outside the firm as an independent venture.
Intrapreneurs may or may not be employed by entrepreneurial corporations.
Intrapreneurship
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Social Entrepreneurs:◦ Develop and implement ventures that
measurably impact social outcomes as well as business outcomes
◦ Act as change agents in the social sector.
Social Entrepreneurship
Examples?
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Venture Company Pitches Review Entrepreneur Essay Assignment –
Due Week 3 Review Reading Assignments for Session 1
of Week 2
Next Week – Week 2
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