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According to the Oxford dictionary entrepreneurship is “the
activity of setting up a business or businesses, taking on financial risks in
the hope of profit” Over half of new start up businesses don’t make it past
year 5. This is a damning statistic but it poses some important questions, what
separates those businesses that fail with those that succeed; what implications
does innovation have on the economy?  Many theorists and thinkers have had their
say, in particular Schumpeter, who by in large agreed with the statement in
question, that innovation is central to entrepreneurship. In this essay I will
discuss this as well as compare Schumpeter’s theory to other important
entrepreneurial theories.

 

Schumpeter’s idea of an entrepreneur largely agrees with the
statement in question. Schumpeter stressed the idea of the entrepreneur as an
innovator who forces change in an economy by introducing new goods or new
methods of production. This idea hinges around the rather simple idea that if
an entrepreneur can create a method of production or create a new or improved
product, the consumer will choose their service rather than one of an existing
competitor in the market. This can be further shown by Schumpeter’s theory of
creative destruction whereby he states that the introduction of new products
kills off other existing products which, in turn, leads to economic growth by
disrupting the circular flow of the business cycle; it will also create new
jobs that didn’t exist before. This reinforces the statement of Innovation
being central to entrepreneurship as it shows that new ideas can effectively
kill off other products in the market, even if they are well established
already, therefore in turn making the existing product in the market obsolete.
There are many examples of this, especially with the presence of modern
technology, making “old fashioned” products and methods outdated and thus,
eventually extinct. One, very famous example would be Amazon. Amazon completely
changed the way books are read by introducing electronic reading with the
Amazon Kindle, released in 2007. Since then Amazon has completely dominated the
books market, boasting a 41% market share of all new book unit purchases, this
is because consumers have discovered that the Amazon Kindle offers a cheaper
and more convenient service meaning many traditional Brick and Mortar
bookstores have become obsolete, over 2,000 independent bookstores have been
killed off due to Amazon and this goes a long way in backing up Schumpeter’s
creative destruction theory, in that Innovation is the main contributor to entrepreneurial
success. This also links to the theory of first mover advantage, which states
the first business to move into a market will benefit by being able to
establish a loyal customer base before other businesses follow suit, this
further reinforces Schumpeter’s point and shows how innovation is central to
overall business success.

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Having said this, other theorists, have come up with their own
ideas in regards to entrepreneurship. One example of this would be Liebenstein
with his X-efficiency theory. Essentially Liebenstein concentrates on
efficiency, claiming that other people’s lack of effort, and the consequent
inefficiency of the organisations that employ them, create opportunities for
entrepreneurs. According to Liebenstein the process of improving efficiency is
called “input completion” and he believed this to be the main role of the
entrepreneur. Input completion can be achieved in many ways. One way to improve
efficiency in a firm would be to increase output of workers, and the obvious
way to do this would be by motivating them more. Motivating employees can be
achieved by paying employees more, empowering employees or by giving them
better working conditions. Analysing Liebenstein’s theory in more depth
motivation could be seen as vital as Liebenstein has a theory Y view of human
motivation, referring to Douglas McGregor’s theory x and theory y theory,
Liebenstein believes that the employee works for himself rather than for the
employer. Therefore, the employee must be motivated otherwise they will become
lazy and disinterested which would lead to high degrees of inefficiency. Highly
motivated employees are imperative to entrepreneurship as businesses will be
able to benefit from higher productivity as a result which in turn will help
reduce unit cost, this would help improve profit margins which in the long term
would improve profits and cash flow position. This is particularly important
for small businesses and those who face a lot of competition as they will be
able to be more competitive by being more flexible with pricing due to lower
profit margins. Moreover, higher profits will allow them to reinvest more money
into different areas of the business, such as innovation. An example of a business
that 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 is
that although Liebenstein is correct on in saying that efficiency is vital to
operations, he doesn’t mention that innovation can actually help improve
efficiency. This can be seen with Ford, in particular with famous entrepreneur
Henry Ford, who invented the production line which dramatically improved
efficiency allowing Ford to produce cars at a much lower unit cost than the
rest of the market. Another example would be Google who used innovation to
create a unique working environment in order to increase creative thinking. This
goes to show that innovation is in fact central to entrepreneurship as it is
the fulcrum to so many different departments.

 

Another factor that is central to entrepreneurship is the
quality of service provided. The theorists Andrews and Penrose believed in
this. Andrews believed that an oligopoly within a market is natural, and that
competition within the industry maintains a fairly uniform price. What divides
the firms is the loyalty of customers to a brand, and in order to achieve brand
loyalty, quality of service is imperative. Quality of service is indispensible according
to this theory as quality of service will in turn lead to an improved brand
image and reputation which will in turn lead to increased repeat sales as
customers will be inclined to use the service or product again, this would
eventually lead to increased revenue and an improved cash flow position which
would result in keeping the business stable. This idea of quality being central
to entrepreneurship is even more important in a competitive market where there
is a lot of competition meaning that there is even more pressure on businesses
to retain customers. An example of a business that operates based on this
theory would be John Lewis. John Lewis have always prided themselves on having
a high level of customer service and it’s largely because of that that they
have been able to survive despite the likes of e-commerce giants such as Amazon
and Ebay also moving into their market. Another example of this is the company
Richer sounds who like John Lewis have succeeded in a competitive market due to
having a high quality product alongside high quality customer service. This
further goes to prove Andrews’ point that quality of service is actually
central for entrepreneurship. Andrews’ idea challenges Schumpeter’s theory and that
innovation isn’t central to entrepreneurship, quality of service is. After
consideration I side with Schumpeter because what Andrews fails to point out in
his work is that innovation can actually add to the quality of service. For
example Amazon warehouses were seen as an innovative step, using technology and
robots in order to speed up delivery and allowing for next day, consistent,
delivery.

 

 

Going back to innovation, its true to say that, many
entrepreneurs can see innovation as having high opportunity cost. The reasoning
for this is because innovation can seem like a lot of money invested for not
much immediate gain especially as the number of products that are actually
successful is very low. Not investing in innovation is especially apparent with
new more inexperienced entrepreneurs who don’t plan for the long term and
solely focus on short term gains. This is where a lot of entrepreneurs go wrong
and maybe why more than half of start-up enterprises don’t make it past the
first five years. Moreover in times of economic uncertainty when businesses
begin to retrench, innovation is normally the aspect of the business that gets
cut as businesses try to ride the storm. However it could be argued that, for some
companies, economic crisis can actually provide an innovation platform. Paul
Schoemaker, research director for the Mack Centre for Technological Innovation
suggested this, he stated “”Loss of revenue and profit will at first instil a
cost cutting mentality, which is not good for innovation. But if the patient is
bleeding you need to stop that first. Then, however, a phase starts where
leaders ask which parts of their business model are weak (and perhaps
unsustainable) and that, in turn, can lead to restructuring and reinvention.”
He also insists that businesses shouldn’t just incrementally innovate, they
should disruptively innovate, referring to the little i and big I of
innovation, he thinks that companies should make more daring, big I,
innovations which disruptively innovate the market, this comes from
Schumpeter’s creative destruction theory of the entrepreneur and further goes
to show the constant importance of innovation, no matter what the economic
climate. The can be further summarised by Apple who are consistently the
highest spenders when it comes to innovation in order to stay ahead of the
game. However for a large company like Apple this is not too strenuous on their
seemingly 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 which
innovation is central to entrepreneurship depends on the business. In
fast-changing markets such as consumer electronics the need to bring out new
products is very strong. Perhaps unsurprisingly one of the biggest sectors for
innovative spending is the pharmaceutical industry; to succeed in this market
firms are constantly striving to develop medicine which they can patent. The
firm 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 research
and development. In a more protected market, where the rate of change is
slower, the need to innovate may not be so great. For example, a recruitment
agency may not spend so much on innovation. However, the fact that some
businesses don’t have to concentrate so much on innovation doesn’t mean they
should totally neglect it, according to Schumpeter creative destruction can
occur in any market and even in a sheltered market, innovation can be the
difference, making it still central to entrepreneurship.

 

To conclude, going back to innovation, it is easy to think
that innovation is just the creation of a new product or service; however, it
is so much more than that. In fact Schumpeter stated that there are five types
of innovation. One being the introduction of a new product; two being a new
method of production which is unproven; three being the opening up of a new
market to the products already produced in the economy concerned; four being
the opening up or conquest of a new source of raw materials or part
manufactures goods and five being the carrying out of a new organisation of
industry, for example, creating or destroying a monopoly condition. All these
types of innovation can help other aspects of the business, as I’ve already
alluded 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 and
innovation can be seen as the key to business success. “Innovation is the only
way to win” Steve Jobs. 

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