Sunday, December 4, 2011

Do Small Business Start-ups Have to Innovate to Succeed?

One of the questions that frequently comes up when discussing a model or plan for a new business (a start-up) is “Is it innovative?” The assumption is that innovation is good and that innovators always have an edge over those who are merely following an established business model. I completely disagree with this assumption and delve into the risky nature of small business innovation in several places in the book, especially in Chapter Four which I have entitled “Small is Beautiful.” Here is what I say in that chapter on page 175:

Given the enormous amount of positive publicity that surrounds innovative companies, it is not surprising that many small start-up entrepreneurs believe that if they are not innovative they cannot succeed. They conclude that a brilliant new idea is the key to fortune and fame. They are wrong. Unlike big start-ups, the vast majority of successful small start-ups I have known begin with basic products and services presented to a known market in fairly traditional ways. Nothing about them would strike you as especially innovative. On the other hand, there are many instances where entrepreneurs flounder and fail as they attempt to create and then launch an innovative, sometimes wildly innovative, business model or product. Creating wealth through innovation is extremely difficult, indeed almost impossible. Statistically, you have better odds of playing in the NFL.”

The reasons I give for the difficulties that start-up innovators encounter include the amount of time and money required for innovation that could be used to assure a successful business launch (in economic terms innovation has high opportunity costs) and the potential confusion innovation can cause in the mind of customers unless it creates immediate benefits to the customer that are simple and obvious. People and markets respond slowly and skeptically to change and entrepreneurs who try to innovate can easily end up standing “Naked in Macy’s Window” (you will have to read Chapter Four to find out exactly what that means.)

Now a new study just released by Accenture (a global management consulting firm) reinforces the idea that (as Accenture puts it) “ideas are unprofitable.” For starters Accenture points out that there are 160,000 patents filed in the U.S. every year of which only about 1,600 (about 1%) ever reach the marketplace as part of a product or service. Few of of these are financial successes. Moreover the Accenture data shows that most of the “highly innovative” companies in America are really not innovative at all. They didn’t invent anything. Instead they are “scalers,” i.e, companies that have been able to take existing products, ideas and business models and make them more efficient and productive, find new applications for them and slowly make them a dominant force in the marketplace. Accenture calls this incremental improvement “renovation” (taking an existing idea and making is work better in the marketplace, examples being Dell, Apple, Wal-Mart) as opposed to “innovation” (being the first to come up with a new idea, examples being Xerox PARC’s computer mouse or Osborne Computer’s personal computing machine). This sounds a lot like the distinction I make between innovative and “replicative” businesses. What are replicative businesses? I answer that in Chapter Eight.

“(Replicative businesses are) ones that start out by providing standard goods and services in standard ways, very likely relying on a customer base in the local community perhaps supplemented by non-local customers acquired through e-commerce marketing efforts.”

But once the business becomes more successful there is ample opportunity to become a “scaler.” As I put it;

“If innovation is in your blood, keep in mind that there is no hard and fast rule that says replicative businesses cannot innovate. This is especially true for businesses that include a substantial service component. As I argue in Chapter Five, service innovation often can be achieved with little or no additional capital outlays and is far less risky and easier to implement or reverse than product innovation. Yet service innovation often has a powerful effect on customers and can take the most boring of business models to a higher level.”

Do you have to innovate to succeed? No. Innovation often fails. On the other hand, if your business lends itself to innovation, once you have successfully completed the start-up phase and are on the path to long-term success you can begin to innovate at a pace you can control and afford. As you scale up, your business just may turn out to be the next Apple or Costco.

© Ralph Blanchard 2011

Reference: Vaclav Smil, The Myth of the Innovator Hero,” The Atlantic. Accessed 16 November 2011.

1 comment:

Eric said...

Excellent post. I enjoyed the insight and it has definitely left me some ideas to ponder. I may start checking this blog regularly.