1: The Context of Monopolistic Competition
The author describes the present market as being "monopolistic competition" - because while there are many independent sellers competing for customers, each seller has monopolistic demesne over its own products as there are government protections for patents and trademarks. There are few products that are completely commoditized, though the distinctions between different brands of the same product are often very superficial (consider Coke and Pepsi).
Such markets are very easy for newcomers to enter or exit. A small firm, or even a single individual, may obtain protection over his distinct product to prevent established firms from making a perfect copy, and he may attempt to sell it to anyone at any price he cares to demand - though customers often will refuse to buy if his price, like his product, is not very similar to that of his competition.
And in such markets, every business would like to be a monopolist - to drive its customers out of business and be the sole provider to all customers. Ironically, the very government that supports monopolistic competition will punish and disband anyone who succeeds - so controlling 90% or 95% of a market to leave token competitors in place is a reasonable compromise. But in a market where products and prices are only slightly different from one provider to another, it is very difficult for a firm to achieve - there is, in fact, no real reason that a customer should choose one product over another, as all will meet his functional needs. (EN: And here arises the importance of psychological needs in a competitive marketplace - the product and price may be identical but the customer has an emotional attachment to a specific brand, often for reasons that have nothing to do with the product or the price.)
Entrepreneurs as Short-Term Monopolists
In spite of the protections afforded to each manufacturer to give it exclusive demesne over its slightly-differentiated product, competitors are quick to find loopholes that enable them to adopt any quality that customers find attractive in another product. Therefore innovation gives a company only a short-term advantage: it enjoys consumer preference between the moment it delivers something unique to the market and the moment its competitors take away this advantage by replicating that quality. Hence, the constant atmosphere of panic at many firms to "innovate or die" is an attempt to constantly stay a step ahead of imitators that are hot on their heels.
(EN: One answer to this problem is to devise innovations that are not easily imitated, which gives the organization more time to move forward as its competitors scramble - but a better one is to devise innovations that others will not imitate even if they can. Finding a profitable way to serve an undesirable market is one such method that some firms have used to remain well ahead.)
An entrepreneur is defined by his willingness to take risks that others will not, to bring something "new" to the marketplace that customers will find more appealing than existing options. Very often, their ideas are not new at all, but are options that others have chosen not to pursue, as they have decided that the idea has little ability to be profitable - which is a bit of a dodge, because what it really means is that they are unable to perceive a way in which to profit. There may be functional impediments, but it is most often a lack of vision.
Being an entrepreneur requires a set of cognitive skills that enable a person to perceive opportunities and then conceive ways to pursue them in a manner that has the potential to be profitable. This in turn requires insight, knowledge, problem-solving, planning, and other skills.
A common misconception is that the entrepreneur is a subject-matter expert. An SME can become an entrepreneur, selling his own idea, but an independent entrepreneur may recognize the value of someone else's idea. He does not need to event, make, or build things because he can hire others to do that work. What he must do is to recognize the value that a thing has the potential to deliver to the market. He is not an expert in things, but in people.
Designing for Continuous Innovation
The author mentions advancements in manufacturing technology that enable the customization and personalization of products to the individual customer. Interestingly, this effectively erases the distinctiveness of brand: if a customer can have any combination of features they want in any product, then one manufacturer's offerings are essentially identical to any other. Whomever the maker is, the customer can configure the products to be exactly the same.
While there has been a lot of hype about personalization, suggesting it's exactly what customers want, it turns out that they want it only in limited amounts. Customers do not want to have to become experts in every product they use, to learn about all the options and features that might be useful for them, and to design their own solution. It's just too much of a cognitive burden. Instead, they want to be able to choose between a few standardized options and make minor adjustments. It is critical to product design to determine what packages to provide and how much flexibility is desirable rather than burdensome.
Large and Small Company Entrepreneurship
It's suggested that only small firms are nimble enough to be truly innovative, as larger firms experience economies of scale from doing the same tasks on a massive scale. There is something to this notion, but largely it is a matter of culture: small firms tend to be more flexible and less devoted to following standard procedures than large ones. They also tend to be less arrogant about their current business practices, and realize that they could do better than they are currently doing.
It is also difficult to maintain momentum in larger firms: it takes a great deal of effort to get hundreds or thousands of people working toward the same goal, and there is reluctance to make change once the wheels are in motion. Even in the software industry, there is a periodic exodus of talent as entrepreneurial employees leave the giant firms to pursue their own projects - very often these are ideas that they offered up to their employers, and were crushed by the bureaucracy.
He mentions Google, specifically, as a firm that experienced a drain of talent. Once a technological innovator, the firm swelled to over twenty thousand employees and became stodgy. Fearful of losing its best minds and the ideas they produced, Google took several measures to retain them by giving them the time and resources to work independently (for example, every Friday their employees are expected to work on their own side-projects rather than their regular duties) and has been able to slow the outflow.
Kingpins of Product Differentiation
The author presents a few brief bits about Jeff Bezos (Amazon) and Steve Jobs (Apple), who are very often mentioned in terms of innovation.
Amazon began as a simple online bookstore, and recognized in the early days of the Internet that companies of all kinds were simply not making their goods available online. Rather than remaining devoted to the concept of being a bookstore, Bezos recognized that his greatest service was in online retailing, and focused on gaining competencies in that area, eventually becoming the Internet's largest department store. He did not limit himself to a specific kind of merchandise, but allowed any product line that met five basic criteria:
- It must be capable of generating significant returns
- It must be able to scale sustainably
- It should address an underserved market
- The market should be highly differentiated
- The firm must be well positioned to sell the product
Similarly, Steve Jobs transformed Apple by letting go of the notion that the firm was a computer manufacturer. Its Macintosh computer never has captured a significant share of the personal computing market, but the company expanded into a broader range of electronics, and its portable music player and smart phone dominate their product categories. It's also noted that the company took a number of risks and has had some spectacular failures (such as the Newton and AppleTV) - which shows that an innovator must take risks.
Neither Amazon nor Apple was a small firm when their legendary CEOs transformed them, as both were well established in niche industries. Had they remained devoted to expanding their market in their original formats, neither company would have grown as substantially as it has - and both may well have failed.
Radical and Incremental Innovation
A brief contrast of these two approaches to innovation:
- Radical innovation is transformative. A company abandons its old line of business and sets off in a bold new direction, all at once, often in ways that transform the industry.
- Incremental innovation is less noticeable. A company stays in its existing market and format and seems to make small improvements and adjustments - though over time this slow change may make a dramatic difference.
Lifecycles
The author mentions marketing lifecycles as a useful way to understand how technology evolves over time: a product is invented, it is adopted by enthusiasts, it spreads to the mass market, then it goes into decline, eventually to be replaced by something else. This same pattern can be seen repeatedly with both high- and low-tech products.
In terms of innovation, it can also be seen with product features. The very first company that rolls out a new feature takes a great risk that it will be adopted - but when it is adopted, it gains the advantage of being the only firm to offer it. Eventually, others imitate the feature and it becomes a standard feature on the same product my all manufacturers, at which point the firm has lost its advantage. Interest in the feature may wane, and eventually a better feature will be discovered to serve the same needs.
(EN: The author fails to mention this, but some companies specialize in offering only the leading-edge of technology and features, quickly adopting new ideas, and just as quickly abandoning them when others begin to imitate them. Consider the luxury market or the high fashion industry - the leaders change their offerings quickly, particularly when less prestigious brands mimic them.)
Adoption Lags Performance
The speed at which technology is adopted by consumers depends on a number of factors:
- Whether the technology provides a benefit (it solves an important problem)
- Whether it is more efficient/effective than existing methods
- Whether the consumers understand it
- Whether consumers can afford it
- Whether the customers area aware of it
- Whether the customers are able to obtain it
While these factors are important in determining whether the product will be adopted by the mass market, they are often not considered by the vanguard. Technology enthusiasts - which is to say nerds and fanboys - will often rush to adopt a new technology just to have it, for social or self esteem, regardless of whether it meets these criteria. Even the mass market is impressed by "new" and "cutting edge" and may purchase technology even if they are not entire sure of what it does or whether it is worthwhile.
But in general, the capabilities of technology often advance before they are adopted because customers need time to learn about and consider them. Aside of periodic manias, consumers need to understand the benefits of ownership before they will make a purchase.
Another factor that causes adoption to lags performance is price. It takes time for firms to develop manufacturing efficiency, so new technology is expensive at first and declines in cost over time - as the price also decreases, more and more customers will adopt it. This also helps to extend the lead of innovative firms: not only do their competitors have to imitate their innovations, but they must gain the same or greater level of efficiency in order to be price competitive.
The Effect of Hype
Hype can create a great deal of excitement and anticipation about a product, even among people who have no idea what the product is or what benefit they might derive from owning it. While this is fairly common in consumer electronics, it is also seen in other industries.
Hype alone cannot salvage a poor product. It can generate significant initial sales, but it can also result in disappointed and even outraged consumers when the product fails to live up to the expectations that have been set, which is damaging to consumer trust of a brand. And given that customers share their dissatisfaction quickly through social media, the damage can be significant even among non-buyers.
The author mentions Gartner's Hype Cycle, which considers the market's enthusiasm for a new technology during five stages: the initial announcement of a new technology, soaring and unrealistic expectations, disappointment when the product doesn't meet those expectations, a process of learning what it really does, and finally a period of more rational adoption.
The Power of Networks
The power of a network - which includes not only computer networks, but transportation systems, power lines, social connections and the like - depends on the number of nodes. The increase is exponential rather than unitary. The author provides a few different models for illustrating this, but they are essentially meaningless: they measure "utility units" that are entirely abstract and imaginary. However, it does stand to reason that adding one more node increases the value of every node in the network. As an example, consider telephone networks. The addition of coverage to Chicago makes the value of the network greater because of the customers in that market - but it also makes the network more appealing to customers in other cities that might wish to use their service to call someone in Chicago.
Also worth considering: the damage done by network failures is also exponential because the elimination of a node diminishes the value of the network. Back to telephony, if service is discontinued in Chicago, the provider loses the residents of that city as customers, but also loses customers in other cities who seek another provider because they can no longer call people in Chicago.
The supply chain can also be considered a network: if a company cannot get its product into the supply chain, customers will be unable to obtain it and will purchase other products instead. The author suggests that this was a major factor in the failure of Betamax and LaserDisc - both were superior to VHS, but because they could not push product through the supply chain, hence were unable for customers to purchase. Even if they could have overcome these problems, VHS already had a significant foothold - it was in the homes of more customers, and customers had built a library of VHS tapes, and so would be unwilling to switch. It's generally known that VHS has lower quality, but the quality of a product that cannot be obtained is irrelevant to consumers.
Push, Pull, and Reload
Market pull is what happens when a firm reacts to customer demand of a product. They demand it of retailers, who demand it of suppliers, who demand it of manufacturers - so it is said that the customers "pull" the product through the supply chain to themselves.
Market push is the opposite: customers aren't demanding the product at all and may be unaware of it, so the manufacturer attempts to pressure the supplier into pressuring the retailer into stocking it, in hopes that once the customer sees it on the shelves, they will be interested in buying it. So it is said the manufacturer "pushes" the product through the chain toward customers.
The author's concept of "reload" occurs when substitute goods are on offer and customers seem to be abandoning their solution. The manufacturer must re-prime the pump by attempting to discredit the substitutes or discount its own price, which may be done by pushing or creating pull. The author suggests that this can go on endlessly, but it stands to reason that if the substitute goods are really better and/or cheaper, the market will eventually adopt them and abandon the older technology.
Research and Development
The objectives of R&D departments are varied at different firms - what exactly are they engaged to research and develop for a firm? While it is generally believed that R&D is engaged in the discovery of new products, these departments are often given the task of simply improving the existing products rather than inventing anything truly innovative.
The task of research is generally considered to be science-oriented: individuals involved in resource are experimenting to see what is possible without any specific purpose in mind. Meanwhile, the development side of the house takes the discoveries of the researchers to see if any value can be made of them - to turn them into a new product or enhance an existing one.
These functions should not be confused with market research. Market research attempts to find out what customers want, so that the company may consider whether it can provide it. Scientific research simply wishes to see what is possible - if it discovers anything, market research can be done afterward to determine whether it's something customers value.
There is also the potential for research to uncover something that customers ought to value, but do not value because they do not recognize how it can benefit them. Advertising can then be used to educate the market about the product and build awareness of it, in hopes that customers who gain understanding of the product will want to buy it.
He finally notes that R&D is generally considered to be the demesne of larger firms who have significant enough revenues to invest in the facilities and personnel to engage in scientific exploration that may or may not generate a return. What is often observed is that one or more of the founders engages in science - he contributes ideas to the business but is disengaged from the day-to-day operations and running the firm.
While entrepreneurs generally are not subject-matter experts, they engage in different kinds of research, such as generating ideas for products and services, studying the markets, developing an testing prototypes of potential products, and the like.
Learning by Doing
The author mentions traditional learning: a person may read, observe, attend lectures, and participate in other activities that enable them to gain knowledge. This is very valuable in general, but it does not necessarily lead to innovation because nothing new can be discovered in this manner: the student learns what is already known from someone else. (EN: Assimilation is often the first step in a creative process - as a person must be familiar with a domain in order to make a meaningful contribution. Also, there is the potential for discovery to come from making connections between things that are already known but are presumed to be unconnected. But generally, the author's statement is correct - as domain knowledge is often used in later phases of the creative process, such as evaluation of an idea.)
The author believes that "learning by doing" is the way in which discoveries are made. An entrepreneur must create models and prototypes and conduct experiments to discover things. Hands-on learning has broadly been found to be more effective, in that the information is better retained and broader than merely reading or listening to a lecture. It is also far more productive - if a "learning" experiment bears fruit, what results is a salable product or usable practice.
Learning by doing becomes essential once a person has exhausted the sources of secondary information. If a field is specialized enough, it is entirely possible for a person to have read everything ever written on the subject, and the only way for them to take their learning further is to observe and experiment.
(EN: The chapter somewhat awkwardly ends here - there's a conclusion that provides a list of bullet points, but nothing to tie all of this together.)