1

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

2

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

3

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

6

Take notes: we’ll be using these ventures as examples

You’ll have one minute for clarifying questions

New Venture Pitches – Audience Role

7

“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

8

“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

9

The Economic and Social

Importanceof Entrepreneurship

“The best way to predict the future

is to invent it.”- Alan Kay

10

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

11

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

12

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

13

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

14

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

15

Entrepreneurshipand

Failure

16

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

17

Entrepreneurship and Economic Progress

18

Competition as we learned it in microeconomics

Recall “perfect competition”

How did one firm compete with

another?What was the

outcome (under perfect

competition)?

19

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?

20

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?

22

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

29

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)

30

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

47

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

48

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

49

“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

50

Entrepreneurship in the Firm

The Creative Function

51

Entrepreneurship as a Role in the Firm

LaborDoes the work

ManagementOrganizes the

work

EntrepreneurshipCreates new work

52

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?

53

Key Elements of Entrepreneurship

Taking Risks

Creating What Wasn’t There Before

(Imagination)

54

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

56

Corporate Entrepreneurship

Entrepreneurial Firms Conservative Firms

• Proactive• Innovative• Risk taking

• Take a more “wait and see” posture • Less innovative• Risk averse

Examples?

57

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

58

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?

59

Venture Company Pitches Review Entrepreneur Essay Assignment –

Due Week 3 Review Reading Assignments for Session 1

of Week 2

Next Week – Week 2