Introduction
The tendency of many individuals and organizations is to focus on factors within their specific core market system perceived as future opportunities or threats. In terms of the influence, these are assumed to come from actions by suppliers, competition, intermediaries, or a shift in the behavior pattern of end users. However, as shown in Figure 5.1, external to the core system are other variables that also represent potential sources of influence on future organizational performance. The key difference between core market and these macroenvironmental factors is the latter are not sector-specific influences. This is because they have a more generic impact, in some cases, influencing the performance of entire economies. The problem is identification and accurately forecasting their impact is more difficult than identifying the potential effect of changes in the core market variables (Liao, Welsch, and Pistrui 2001).
Figure 5.1 A market system model
Economics
A potentially disruptive technological innovation can only succeed when the new proposition generates a profit. In his original formulation of disruptive innovation, Christensen’s (1997) perspective was that of market success being achieved by developing a product of service, which although exhibiting a poorer performance than existing established goods, was capable of being offered at a lower price. Although examples such as the minicomputer, the mini-mill, and first-generation PCs provide validation of his theory, the number of successful market entries is somewhat limited. This is because low-end disruption usually does not involve a major investment in new technology, but in most cases, is the outcome of a clever recombination of existing technologies.
Subsequently, it has been accepted that there may also be a potential for disruption by developing a high-end, superior-performance proposition. The reason for high-end market entry is that, developing a new technology is typically a very expensive process. As a consequence, the initial launch will need to be a high-end premium price introduction in order to generate a profit. This situation usually necessitates that prevailing economic conditions permit potential customers to perceive the new proposition is affordable. Even where economic conditions are positive, initially, the new product will tend be perceived a niche product only of interest to a limited number of potential customers.
Although new high-end niche propositions are of minimal concern to companies involved in supplying products or services using existing conventional technology, the potential threat is that should cost reduction through innovation permit a price reduction, then the benefit offered by the new technology will be perceived as affordable by the majority of customers in a market sector. As this juncture, significant market disruption is likely to occur. The outcome for long-established suppliers may be that of declining revenue, which in some cases, may eventually lead to bankruptcy, unless these organizations develop the capability to begin exploiting the new technology.
High-end disruptors’ strategy is to produce innovations that are leapfrog in nature, making them difficult to be rapidly imitated. They outperform existing products on one or more critical high appeal benefits at launch, sell for a premium price, and target incumbents’ most profitable customers, going after the most discriminating and least price-sensitive buyers before spreading to the mainstream. Examples include Apple’s iPod displacing the Sony Walkman, Dyson’s bagless vacuum cleaners’ impact on the conventional vacuum cleaner manufacturers, and the mobile telephone as these became smaller and cheaper. Existing incumbents did not react fast enough and these high-end disruptors took over their markets (Sandström, Magnusson, and Jörnmark 2009).
High-End Risk
Case Aims: To illustrate the risks associated with investment in high-end technology, which is more expensive than conventional technology
An example of a high-end alternative technology is provided by the development of fracking in the oil and gas industry. This technique was first developed in the late 1940s to stimulate greater output for existing hard-rock wells involving the injection of a pressurized liquid. It was not until the 1980s that producers began experimenting with ways of opening up new wells from oil and gas deposits located in high-permeability rock formations. The new process involves the high-pressure injection of “fracking fluid” constituted of primarily water, sand, or other chemicals to create cracks in deep-rock formations. The entrepreneurial innovation that dramatically expanded access to more difficult deposits was the development of horizontal drilling in place of the more conventional process of vertical drilling.
The drawback with fracking is the breakeven production cost is in the region of $50 a barrel, whereas breakeven for producers in the highly productive Middle East fields is in the region $5 to $10 per barrel. Hence, it was only when oil prices at times significantly exceed $50 per barrel is fracking a commercially viable proposition. Hence, as world prices began to trend upward, there was a major expansion in the use of racking by the oil industry. However, the downturn in the global economy in 2015 caused demand for oil to decline and oil prices fell to below $50 per barrel. Although the price drop affected the total revenue of producers in the Middle East using conventional vertical drilling technology, the impact on the U.S. fracking industry was much more dramatic, with many producers beginning to lose money. This resulted in some wells being shut down and plans for new drilling to be severely curtailed. This situation subsequently proved to be a short-term scenario, and when the OPEC nations decided to curtail the total production, oil prices have begun to rise and the more productive fracking sites are again generating a profit.
Playbook Guideline 42: Opportunities exist for moving from a high-end entrepreneurial niche product to a mass-market positioning when cost reduction or where positive economic conditions permit
Politics
Most Western democracies can be considered as moving through three phases (Bannister and Wilson 2011). During the first phase, which lasted from the mid-1950s until the late 1970s, Western governments engaged in problem solving, market interventionist activities, and the creation of the welfare state. During the 1980s, the “lean state” concept emerged with “big government” going into decline, as politicians sought to reverse many of the changes of the preceding three decades, which had resulted in rapidly rising levels of inflation and public sector labor unrest. The outcome was “new public management” model involving the ideas of privatization, decentralization, hollowing out, managerialism, de-layering, outsourcing, and marketization. More recently, governments have moved into the “activating phase” in which governments have evolved into players in a web of interrelationships between public bodies, state agencies, and organizations.
No matter which phase of process prevails, governments tend to seek to influence economic growth by stimulating innovation in the newer industries, such as biotechnology and computing, using a variety of tools such as grants, soft loans, reduced taxes, and inward investment grants. Although there is variable evidence concerning the impact of such initiatives, the general consensus in the literature is that governments are rarely capable of “picking winners.” As a result, successful outcomes have only been achieved in only a minority of cases. Brown and Beynon-Jones (2012) posited a key reason is the susceptibility of government bodies to believe scientific claims by key business stakeholders of a need to react rapidly to often unchallenged claims of the imminent risk of falling behind in global high-tech markets. The researchers believed this behavior trait can be expected to continue to inhibit the opportunity for a government policy to have a major positive impact on leading-edge innovation in their respective countries. In part, this failure can be explained by the relatively short period of time that a politician spends in office, thereby orientated toward projects that appear to offer immediate success before the next electoral cycle.
Based on the research on Japan, Beason and Weinstein (1995) concluded that there is no real economic benefit to be generated by government policy tools aimed at supporting of high-growth industries. In fact, in the case of Japan, it appeared that sectors most favored by government intervention tended to be slow-growth industries. As a consequence, subsidized sectors such as textiles, mining, and steel continued to get bigger. Furthermore, they found the application of industrial sector support tools was highly unsystematic, with some sectors benefiting from one measure and simultaneously suffering from some other contradictory one. The researchers concluded that Japan exhibited traits in relation to supporting innovation very similar to those used by the French and American governments, namely politically driven, favor-based, uniformed, and biased decisions in most cases have been nonhelpful to these nations’ respective overall economic performance.
Playbook Guideline 43: Identification and support for specific industries by governments is not very likely to ensure long-term success through engagement in innovation
Legislation
Governmental regulation involves the employment of legal instruments for the implementation of socioeconomic policies. A characteristic of legal instruments is that individuals or organizations can be compelled by government to comply with prescribed behavior under the penalty of sanctions. Corporations can be forced, for example, to observe certain prices, to supply certain goods, to stay out of certain markets, to apply particular techniques in the production process, or to pay the legal minimum wage. Sanctions can include fines, the publicizing of violations, imprisonment, an order to make specific arrangements, an injunction against withholding certain actions, or closing down the business (Van den Bergh 2016).
The “normative theory of regulation” deals with reasons why market failure has necessitated the need for regulations. Failures can range from external effects, natural monopolies, public goods availability, sunk costs, ruinous price war, universal service, interconnection, cross-subsidization, and asymmetrical information in relation to economically important sectors. The regulative instruments for intervening in markets can include barriers to market access and price regulation. Regulation shapes the motivations and abilities, and thus, changes incumbents’ behavior. This suggests governmental regulation can be one of the main drivers in some markets because the existence of legislation has the potential to substantially change the motivation and ability of new entrants and incumbents (Christensen, Anthony, and Roth 2004).
Playbook Guideline 44: Technological entrepreneurs need to be aware that government legislation can be a major barrier to achieving commercial success
Government Regulations Impacting Energy
Case Aims: To illustrate how technological innovation can be influenced by governments, instead of a market opportunity
Growing concerns about global warming and the adverse environmental impact of burning pollution-causing fuels, such as coal, have influenced the developed nation governments to focus on the replacement of hydrocarbon energy with renewable resources, such as wind and solar power. Solar firms in some countries are still faced with environmental uncertainty in relation to investing in technological innovation or scaling up their operations. One source of environmental uncertainty arises from firms’ inability to predict accurately the future state of governmental policies. The effects include a perceived inability to predict effects of future policy states or the consequences of response to new legislation. Disagreement and uncertainty may also arise from how to implement regulation. For example, in Europe, having announced subsidies for solar energy generation, governments have determined these are too expensive, and subsequently, severely reduced these causing financial problems for both producers and consumers. Another source of uncertainty stems from the relations and interdependence of regulation on solar energy to other energy regulation. (Hoffmann and Busch 2008).
Green (2008) noted that Shell Oil’s former President and CEO John Hofmeister, when speaking of the U.S. situation, suggested that America’s “energy is politicized.” In reality, this statement can be extended to cover most other major nations (e.g., Russia’s use of gas pricing to influence the loyalty of East European nations; America’s policy only recently revoked of banning oil and gas exports). It is possibly very relevant in the field of renewable energy, as governments have sought to ensure that their domestic firms have obtained a share of this rapidly growing sector within the energy industry. This situation creates a major dilemma for firms committed to a strategy based on the technological entrepreneurship because their success is dependent on responding to government regulations, which may create obstacles in relation to focusing on investing in new technologies capable of achieving long-term market success.
Technology
With an improvement to a well-understood technology or the advent of a totally new technology, firms face the scenario that a technological change can be considered an opportunity or a threat. Hence, tracking a technological change is a critically important. The activity becomes infinitely more difficult in those cases where the new technology originates from outside an industry sector. This is because when a new technology from outside an industry sector incumbent firms often lack the capabilities to exploit this technology (Zahra and George 2002). A classic example of this scenario was the introduction of the microchip in the watch industry severely impacting the majority of existing firms, which continued to use the traditional mechanical clockwork movement in their products.
Incumbents may face the difficult choice about which innovations might sustain performance. When a radical entrepreneurial innovation opportunity arises, the incumbent must weigh the potential benefits of costs and risks versus benefits. A radical innovation may offer the promise of superior performance, but development risks can be high. Hence, commercial returns can be difficult to predict (Chao and Kavadias 2008).
Hill and Rothaermel (2003) opined that, for incumbents, the possibility of new entrepreneurial entry from outside the industry complicates the choice of future innovation pathways. This is because radical innovation may have the potential to supplant, and eventually, overtake existing products. Consequently, this makes radical innovations especially appealing to entrepreneurial entrants as providing a drastic change capable of dislodging existing firms from their dominant industry position.
Available evidence suggests firms to rely on rivals’ actions as a source of information about the market potential for radical innovations. Much of the extant literature has examined why incumbents might underinvest or ignore radical innovations. One explanation for such behavior is the lack of incentives to cannibalize revenues from existing products or to replace expensive capita assets associated with exploiting current technology (Chandy and Tellis 1998). Organizational inflexibility and core rigidities of development teams and management have also been identified. There is also the possibility that incumbents have a bias against radical innovation on the basis of inputs from their current customers.
Traditional monitoring processes in nonentrepreneurial companies are largely arbitrary, dependent on what individuals in the company believe. In today’s world, such an arbitrary process is insufficient. Hence, to overcome this problem, a number of new techniques, known as technical intelligence (or TI), have been developed (Lichtenthaler 2004). The techniques are based on scanning and monitoring activities linked to a knowledge management system to store, retrieve, and prioritize relevant technological information. For the TI process to be truly effective, there needs to be development of the capability to predict potential technology-based threats and opportunities as well as connecting a company’s core competences to relevant technological surroundings.
Playbook Guideline 45: Remaining ahead of competition depends on effective monitoring of technological trends, both inside and outside specific sectors of industry
Meta-Trends
Meta-trends are emerging events or scenarios that will impact entire populations at a national, regional, or global level. The importance of meta-trends is that problems may become apparent, which can only be resolved through entrepreneurial technology. Brown and Flynn (2008) posited that climate change represents, perhaps, the most profound of the many environmental meta-trends expected to impact business in the 21st century. In 2007, the Intergovernmental Panel on Climate Change (IPCC) released the Fourth Assessment Report summarizing a range of impacts and policy recommendations around predicted climate change trends. The report forecasted that climate change will cause more variable weather, heat waves, heavy precipitation events, flooding, droughts, intense storms, and air pollution. Such studies have caused most governments to become concerned about global warming. In turn, this has resulted in grants and subsidies being made available, which has accelerated entrepreneurial activity in areas such as emission reduction in traditional industries and in new renewable energy technologies.
While scientists predict climate change will amplify global stresses over the coming decades, concerns are also rapidly growing about the availability of adequate supplies of freshwater. Currently, agricultural irrigation accounts for 70 percent of global water usage and can represent much as much as 95 percent of the total water use in developing countries. Industry follows next with 22 percent of global water use for energy production, processing, cooling functions, a resource input in many products, and waste disposal. With only 8 percent left for use by the domestic sector, more than one billion people currently have no access to safe drinking water worldwide (United Nations 2003).
The United Nations’ prediction is that, by 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, while two-thirds of the world’s population could be living without access to enough clean water to meet their needs. These concerns have resulted in expanded interest in desalination technology, which is an energy-expensive proposition. Hence, research has focused on ways of reducing energy utilization.
The other adverse impact of inadequate water supplies is on agriculture. This has resulted in entrepreneurial activities in two areas. The first has been in the area of improved, more efficient irrigation systems exploiting concepts such as remote location sensors. Accompanying these efforts has been focus on using genetic modification (GM) to develop crops more resistant to limited availability of water (Dascher, Kang, and Hustvedt 2014).
Another meta-trend is that of population ageing that is caused by people living longer and declining birth rates. The outcome is that of people aged 65+ becoming an increasingly dominant component of a nation’s population. This has two implications, namely the increase in age-related mental illnesses, such as dementia, and the rising cost of the high labor content process of caring for older people. In relation to mental illness, entrepreneurial opportunities from this meta-event are likely to arise from radically different medical solutions as a consequence of ongoing research into brain mapping and understanding the physiology of nervous system change and deterioration. As far as reducing labor costs, two areas of development are the use of remote sensors to monitor people in their own homes and the introduction of robots to replace the use of human carers (Chaston 2009a).
Playbook Guideline 46: Meta-trends offer excellent opportunities for the identification of problems and the generation of new opportunities for the technological entrepreneur.