Seminar 1 Innovation

7/24/2019
ENTREPRENEURSHIP & INNOVATION
MGMT8015
Presented by
Ian Elsum and Stewart Rendall
Ian Elsum – MGMT8015 – 24 July 2019
My journey
• Academic chemist
– Monash University; Harvard University; ANU
• Strategic management of applied research
– CSIRO: ICT, advanced materials, manufacturing, pharmaceuticals and human
health
• Practitioner‐oriented research on technology‐based innovation
– Industrial Research Institute (now Innovation Research Interchange)
• Research‐on‐Research: Knowledge management in R&D; Venture capital practices
and established firms; Radical innovation; Managing high uncertainty innovation;
Business model innovation challenges; Digitalization and R&D management:
collaboration
• Through which I developed broad interests aimed at improving the
effectiveness of the management of innovation
– management of radical innovation, business model innovation in established
firms, open innovation, commercialisation of major inventions from public
research institutes and the role of social networks in innovation.
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Stewart Rendall
• I have held numerous MD/CEO roles for a variety of
organisations. I have more than 30 years experience, with
personal leadership of companies of between 2 and 1800
staff; management of all aspects of organisations including
operational, technical and marketing; the creation of three
‘start ups’; extensive M&A and business reconstruction
expertise; and employment with companies as diverse as
Telstra, Deloittes and British Airways.
• I have lived and worked in Europe, North America, and Asia
and acted as a Business Mentor within the Federal
Department of Industry, Innovation and Science; as well as
Advisor to several other Australian Government
Departments.
MGMT8015
This is a foundation course in entrepreneurship and
innovation.
It provides:
• the conceptual foundations for the management of
the processes of innovation and entrepreneurship;
and,
• an introduction to tools and frameworks for
identifying and managing innovation and new venture
opportunities.
The course is delivered in seminars supported by
readings, cases and exercises.
• interaction and discussion
• engage with the in‐class exercises
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Overview
Innovation Module
Innovation Types & Uncertainty Innovation Capturing Innovative

and its sources of and eco- value from organisations
challenges innovation learning systems innovation
Entrep- Identifying & Relation- Tools; Building & How

renurship & assessing ships, processes; communic- new
economic opportunities networks & business ating the ventures
growth resources model case evolve
canvas
Entrepreneurship Module
Some themes
• Novelty results in uncertainty
• Novelty leads to learning‐through‐doing
 act – sense – respond
• “it depends” – match the management
process to the context (situation)
– There are very large differences between what’s
effective for managing major innovation projects
and incremental innovation projects, for example.
Additional themes will emerge throughout the
course.
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Assessment
(1) Formative Work – 30%
– Weekly pre‐reading responses
• 8 of 11 possible must be submitted
– In‐class cases and exercises (most weeks)
– On‐line quiz (week 6, open for 2 weeks)
(2) Essay – 30%
– Due week 10 (13 October)
– up to 1,500 words plus an appendix in which you summarise your
search for, and evaluation of, evidence
– more about what’s expected during the seminar in week 4
(3) Final examination – 40% (Exam period)
For details, refer to the Course Summary (available on Wattle)
• Today we are starting our journey of learning
about innovation and entrepreneurship.
• I want seminars to be interactive, with
contributions from all of us.
• Ask a question if something puzzles you.
• Participate in discussions – there will be several
‘discussion points’ in every seminar
– discussion of the pre‐reading is one example.
• . . and always keep in mind that most questions
in innovation and entrepreneurship do not have a
simple yes/no or right/wrong answer.
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Today’s seminar
• What is innovation?
• Why do firms innovate?
• Challenges for innovating successfully
• Pre‐reading for next seminar: the concept
of a dominant design
What is “innovation”?
What words or phrases do you
associate with “innovation”?
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innovation = invention + exploitation
Innovation has two components
1. creation of something new (invention) and
2. exploitation of the new “thing”; that is,
putting the invention to use to create value.
Both components are essential.
They also interact.
First clothes peg
Invented early 1800s Invented 1853; this version an
33¢ per peg improvement from 1887
Wood 5¢ per peg
Plastic 3¢ per peg
Polypropylene with non‐
slip elastomer pad
Many colours
125¢ per peg
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Pre‐reading
Sections 1, 2.2, 2.3, 2.4 and 5 of
Orietta Marsili and Ammon Salter
‘Inequality’ of innovation: skewed distributions and the
returns to innovation in Dutch manufacturing
Economics of Innovation and New Technology 14(1‐2),
83 – 102 (2005)
Lognormal distribution* of returns
Innovation is largely a
number of firms ‘winner‐takes‐most’
competition with a small
minority of firms earning the
great majority of the rewards.
0 very large
size of return on innovation
* a skewed distribution Ian Elsum – MGMT8015 – 24 July 2019
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Skewed distribution of returns
Example from a large firm
Full sample
(190 transfers to business units)
Overall rate of return (IIR) 20%
Fraction providing 50% of the total return 2.6%
(5/190)
Fraction with payback above breakeven 50%
Intensively studied sample
(34 transfers to business units)
Payback ratio <2 65%
Payback ratio 2 - 15 15%
Payback ratio >15 20%
Skewed distribution of returns
SBIR results for firms with sales (47% of total)
100
90
80 ~2% of these firms
70 account for >50%
% total sales
60 of total sales
50
40
30
20
10
0
0 10 20 30 40 50 60 70 80 90 100
SBIR: Small Business Innovation % firms with sales

Research Program (USA)
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Question for discussion
A small minority of innovating firms earn
the great majority of the rewards from
innovation.
Why do so many firms devote significant
resources to innovation?
• About 2/3rd of all firms in the study by Marsili and Salter
and about 2/3rd of all Australian businesses with 20 or
more employees, for example.
Why do so many firms innovate?
• Survival Incremental innovations
– Businesses need to keep their • lower novelty
products and services as least
as good as (that is,
competitive with) those of
other businesses
• Business growth
– Differentiating their products Major innovations
and services from those of (breakthrough, radical, etc.)
other businesses to increase • higher novelty
market share and/or
profitability
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Why do so many firms innovate?
Competition between firms to provide value and
so capture value for themselves
– Cost
– Differentiation: product and service attributes
(quality)
If a firm isn’t competitive, then it won’t survive
or grow its business.
Which company was the first to introduce a diet cola?
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Which company was the first to introduce a diet cola?
• Competition between firms
makes sustained value
capture difficult.
• Hence the need to innovate
continuously.
Other findings from this research:
• The distribution of returns is more skewed –
that is, concentrated in fewer firms – for
higher novelty innovations (major, radical,
breakthrough, etc.)
• There are large changes over time in the
performance of individual firms within a
stable overall distribution of returns.
What might explain these findings?
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Not every innovation is a success.
The success rate for Year of study Success rate %

1965 67
new products has not
1977 65
changed over the past 1979 52
45 years. What might 1980 60
explain this? 1986 61
1987 65
1993 67
1993 55 – 76
1993 58
1997 60
George Castellion and Stephen Markham, 2004 54 – 76
New Product Failure Rates: Influence of 2009 59
Argumentum ad Populum and Self‐
2010 45 ‐ 62
Interest, J Prod Innov Manag 30(5) 976 ‐
979 (2013)
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• It is difficult for innovating firms to predict
how successful their innovation will be.
• Lack of predictability is associated with
uncertainty (unknowns).
– The uncertainty is irreducible: uncertainties can
only be resolved (unknowns converted to knowns)
by taking action and learning from what happens.
• Higher novelty is associated with higher
uncertainty and lower predictability.
Substantial uncertainty and lack of predictability is
consistent with:
• A small minority of innovating firms earning the
great majority of the rewards from innovation.
• The distribution of returns being more skewed –
that is, concentrated in fewer firms – for higher
novelty innovations (major, radical, breakthrough,
etc.)
• Large changes over time in the performance of
individual firms within a stable overall
distribution of returns.
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The strong correlation between novelty and
uncertainty has important implications for
managing innovation.
We will be exploring these implications.
The process of innovation is an exercise in the
management and reduction of uncertainty
(Kline and Rosenberg An overview of innovation 1986)
The story so far
Innovation matters
for individual firms
• Innovative activities are the most important
determinants of general success. For a wide range of
industries they discriminate between the more and
less successful firms better than any other variable.
– Success: a composite measure of a firm’s gain in market
share and its profitability growth relative to its industry.
– Strategies for Success: A Profile of Growing Small and Medium Enterprises in
Canada 1994
and for regions and countries
• As much as 50 per cent of economic growth in OECD
countries can be accounted for by innovation activity.
(OECD 2015)
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Innovation enables businesses to
1. stay in business
Incremental
• by keeping their products and innovations
services as least as good as (lower novelty)
(that is, competitive with) those
of other businesses
2. grow their business
• by differentiating their products Major
and services from those of innovations
other businesses (higher novelty)
• Innovation matters; however, the return on
investment in innovation is uncertain, with
higher levels of uncertainty (that is, lower
predictability) associated with the high
novelty innovations that have the highest
potential return.
so
• How can innovation, particularly innovation
involving high levels of novelty, be managed to
increase the probability of success?
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Another perspective on innovation
You are working on a new product in the engineering
division of a large manufacturer. There are 1,000 people
in the division, with 440 working on the new product.
Which is the better predictor of your involvement in
innovation: technical knowledge or social knowledge?
• Technical knowledge is measured by your response to the
question: “In general, how comfortable are you addressing the
more advanced technical issues associated with the new
product?” (7 point scale)
• Social knowledge is measured by your response to the question:
“In general, how easy would it be for you to get candid, ‘behind‐
the‐scenes’ input regarding product development issues?” (7
point scale)
You can assume that everyone working on the new product is a
qualified scientist or engineer.
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Your social knowledge predicts your
involvement in innovation. There is no
association between the level of your
technical knowledge and your
involvement in innovation.
• Research study described in D Obstfeld, Social networks,
the tertius iungens orientation and involvement in
innovation, Admin Science Quarterly 2005
The cases reveal clearly the importance of “invisible
colleges”: scientists and engineers who share
results and know‐how via networks that span both
cooperating and competing institutions. Isolation
appears clearly as the enemy of innovation.
– from a (US) National Science Foundation study of
technology‐based innovation
You can go to a dinner party and most of the people
there will work in tech, so the chance you’ll meet a
useful connection or learn something that’s useful
to your business is very high without even trying.
– Anthony Goldbloom, founder of Kaggle, on why he moved
from Melbourne (Australia) to San Francisco
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Innovation is the development and
implementation of new ideas by people who,
over time, interact with others within an
institutional and environmental context
Innovation is a collective achievement: it’s a
social process.
• The key challenges for success are rooted in
characteristics of humans and social
processes. They are not technological.
The definition of innovation is based on Andrew H Van de Ven
Central problems in the management of innovation Management Science
vol. 32, no. 5, pages 590 – 607 (1986) Ian Elsum – MGMT8015 – 24 July 2019
Challenges for success
• Uncertainty and ambiguity associated with
doing something new
• Success requires adoption and use by others
• Ensuring both individuals and organisations
pay attention to novelty and routinely seek
out opportunities
• Capturing value from innovation
• Complexity and interdependence
– This arises from the proliferation of people and
relationships as ideas are developed and
implemented.
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Perspective and emphasis
• Innovation in commercial businesses
– The principles are generic. Examples will be from
businesses.
• A general management perspective
• A strategic rather than an operational orientation
• Emphasis on significantly new products and
processes (rather than incremental ones)
• Frameworks, approaches, techniques, tools, etc.
that can be used to increase the probability of
success when innovating
Challenges for success
• Ensuring both individuals and organisations pay
attention to novelty and routinely seek out
opportunities SEMINARS 2 & 6
• Uncertainty and ambiguity associated with doing
something new SEMINAR 3
• Success requires adoption and use by others
SEMINAR 4
• Capturing value from innovation SEMINAR 5
• Complexity and interdependence
– This arises from the proliferation of people and
relationships as ideas are developed and implemented.
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Next week
Types and sources of innovation
• Pre‐reading
– Mary J Benner and Mary Tripsas, The influence of
prior industry affiliation on framing in nascent
industries: the evolution of digital cameras, Strategic
Management Journal 33, 277 – 302 (2012)
• Question
– Why were firms from the consumer electronics
and computing industries (Sony, Casio and
Toshiba) the first to produce the dominant design
for consumer digital cameras and not a
photography firm?
The concept of a dominant design
Product innovation
Process innovation
Dominant design
time
Product From high variety, to dominant design, to incremental innovation on

standardized products
Process Manufacturing progresses from heavy reliance on skilled labour and general–
purpose equipment to specialised equipment tended by low‐skill labour
From James Utterback Mastering the Dynamics of Innovation 1994
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Dominant design established
Cars with Cars with gasoline
gasoline, electric engines; all steel
or steam engines; closed body;
with steering engine connected
wheels or tillers; to wheels
and, with wooden through a
or metal bodies transmission and
a drive train;
mounted on a
frame rather than
on the axles.
The dominant design
From James Utterback
Mastering the
Dynamics of Innovation
1994
Dominant design
• A period of experimentation with a product, both in the
components and how they are put together
– The experimentation is collective: all the firms in the industry
competing with one another and observing the performance of
their, and other firms’, products in the market.
• Ends with emergence of a dominant design
• The dominant design: a set of core design concepts that
correspond to the major functions performed by the
product, embodied in both the components of the
product and how they are integrated together.
• A dominant design incorporates a range of choices about
the product design that are not revisited in every
subsequent design.
William J Abernathy and James M Utterback, Patterns of Industrial
Innovation, Technology Review 80(7) 40‐47 (1978)
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Questions?
SUPPLEMENTARY SLIDES
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The success rate for new ideas
(substantially new products and services)
300 ideas 125 small
explored projects
0.3% 0.8%
Castellion and
Markham paper
1.7 commercial 4 major 9 substantial

launches developments developments
60% 25% 11%
1 commercial success
GA Stevens and J Burley, Research Technology Management, 40(3), 16 – 27 (1997)
Novelty and the distribution of returns
least skewed most skewed
‐ a more even ‐ winner(s) take most
distribution of returns of the returns
lower novelty higher novelty
‐ incremental ‐ major innovation
innovation (breakthrough,
radical, etc.)
23

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7/24/2019

Ian Elsum – MGMT8015 – 24 July 2019

Innovation Types & Uncertainty Innovation Capturing Innovative

Entrep- Identifying & Relation- Tools; Building & How

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

* a skewed distribution Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

SBIR: Small Business Innovation % firms with sales

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

The success rate for Year of study Success rate %

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

Product From high variety, to dominant design, to incremental innovation on

Ian Elsum – MGMT8015 – 24 July 2019

Ian Elsum – MGMT8015 – 24 July 2019

1.7 commercial 4 major 9 substantial

Ian Elsum – MGMT8015 – 24 July 2019

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