Workbook for Entrepreneurship and Innovation: Theory, Practice and Context [4th ed. 2020] 978-981-13-9415-7, 978-981-13-9416-4

Table of contents :
Front Matter ....Pages i-xi
Work Book: Entrepreneurship as a Social and Economic Process (Tim Mazzarol, Sophie Reboud)....Pages 1-8
Work Book: The Entrepreneur (Tim Mazzarol, Sophie Reboud)....Pages 9-19
Work Book: The Entrepreneurial Process (Tim Mazzarol, Sophie Reboud)....Pages 21-30
Work Book: Entrepreneurship and Innovation in Large Firms (Tim Mazzarol, Sophie Reboud)....Pages 31-44
Work Book: Innovation in Small Firms (Tim Mazzarol, Sophie Reboud)....Pages 45-61
Work Book: Adoption and Diffusion of Innovation (Tim Mazzarol, Sophie Reboud)....Pages 63-76
Work Book: Planning, Business Models and Strategy (Tim Mazzarol, Sophie Reboud)....Pages 77-85
Work Book: Risk Management in Innovation (Tim Mazzarol, Sophie Reboud)....Pages 87-95
Work Book: Disruptive Innovations and the Commercialisation of Technology (Tim Mazzarol, Sophie Reboud)....Pages 97-104
Work Book: Screening Opportunities and Assessing Markets (Tim Mazzarol, Sophie Reboud)....Pages 105-115
Work Book: Team Building, Company Leadership and Strategic Alliances (Tim Mazzarol, Sophie Reboud)....Pages 117-138
Work Book: Financing the Venture (Tim Mazzarol, Sophie Reboud)....Pages 139-151
Work Book: Intellectual Property Management (Tim Mazzarol, Sophie Reboud)....Pages 153-158
Work Book: Social Innovation and Enterprise (Tim Mazzarol, Sophie Reboud)....Pages 159-169
Back Matter ....Pages 171-215

Citation preview

Springer Texts in Business and Economics

Tim Mazzarol Sophie Reboud

Workbook for Entrepreneurship and Innovation Theory, Practice and Context Fourth Edition

Springer Texts in Business and Economics

More information about this series at http://www.springer.com/series/10099

Tim Mazzarol • Sophie Reboud

Workbook for Entrepreneurship and Innovation Theory, Practice and Context Fourth Edition

Tim Mazzarol University of Western Australia Crawley, WA, Australia

Sophie Reboud Burgundy School of Business Dijon, France

ISSN 2192-4333     ISSN 2192-4341 (electronic) Springer Texts in Business and Economics ISBN 978-981-13-9415-7    ISBN 978-981-13-9416-4 (eBook) https://doi.org/10.1007/978-981-13-9416-4 3rd edition: © Tilde Publishing and Distribution 2017 © Springer Nature Singapore Pte Ltd. 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Contents

1 Work Book: Entrepreneurship as a Social and Economic Process ������   1 1.1 Learning Objectives����������������������������������������������������������������������������   1 1.2 Chapter Review����������������������������������������������������������������������������������   1 1.3 Learning Activities������������������������������������������������������������������������������   2 1.4 Key Lessons from the Chapter������������������������������������������������������������   2 1.5 Exercise: Profiling Activity����������������������������������������������������������������   3 1.6 Case Study Analysis����������������������������������������������������������������������������   3 Questions/Tasks��������������������������������������������������������������������������������    3 1.7 Case Study: Small Entrepreneurial Firms in the Asia-­Pacific Region ������������������������������������������������������������������������������������������������   4 Unirex Kabushiki Gaisha, Japan������������������������������������������������������    4 Boots Online, Australia��������������������������������������������������������������������    5 Electrical Components, Malaysia ����������������������������������������������������    6 Vjandep Pastel Bakeries, Philippines�����������������������������������������������    7 References����������������������������������������������������������������������������������������������������   8 2 Work Book: The Entrepreneur����������������������������������������������������������������   9 2.1 Learning Objectives����������������������������������������������������������������������������   9 2.2 Chapter Review����������������������������������������������������������������������������������   9 2.3 Key Lessons����������������������������������������������������������������������������������������  10 2.4 Learning Activities������������������������������������������������������������������������������  11 2.5 Exercise – Profiling Activity ��������������������������������������������������������������  11 2.6 Creativity Journal��������������������������������������������������������������������������������  11 Creativity Journal Framework����������������������������������������������������������   12 2.7 Individual Assignment – Am I an Entrepreneur?��������������������������������  13 Writing the Assignment��������������������������������������������������������������������   14 2.8 Case Study Analysis����������������������������������������������������������������������������  14 Questions/Tasks��������������������������������������������������������������������������������   15 2.9 Case Study: Lessons from Entrepreneurs ������������������������������������������  15 Case Study: Brian ����������������������������������������������������������������������������   15 Case Study: Andrew��������������������������������������������������������������������������   16 Case Study: Jim��������������������������������������������������������������������������������   17 Case Study: Peter������������������������������������������������������������������������������   18

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3 Work Book: The Entrepreneurial Process����������������������������������������������  21 3.1 Learning Objectives����������������������������������������������������������������������������  21 3.2 Chapter Review����������������������������������������������������������������������������������  21 3.3 Key Lessons����������������������������������������������������������������������������������������  22 3.4 Learning Activities������������������������������������������������������������������������������  23 3.5 Group Exercise: Creating Jobs and Economic Growth����������������������  24 The Problem Outlined����������������������������������������������������������������������   24 Your Task Explained ������������������������������������������������������������������������   25 3.6 Case Study Analysis����������������������������������������������������������������������������  25 Questions/Tasks��������������������������������������������������������������������������������   26 3.7 Case Studies of Nascent and Novice Entrepreneurs ��������������������������  26 Case Study: Malcolm (Non-Starter): The Nascent Entrepreneur ����   26 Case Study: Richard (Starter): The Novice Entrepreneur����������������   28 Reference ����������������������������������������������������������������������������������������������������  30 4 Work Book: Entrepreneurship and Innovation in Large Firms ����������  31 4.1 Learning Objectives����������������������������������������������������������������������������  31 4.2 Chapter Review����������������������������������������������������������������������������������  31 4.3 Key Lessons����������������������������������������������������������������������������������������  32 4.4 Learning Activities������������������������������������������������������������������������������  33 4.5 Creativity Journal Entry����������������������������������������������������������������������  34 4.6 Case Study Analysis����������������������������������������������������������������������������  34 Questions/Tasks��������������������������������������������������������������������������������   34 4.7 Case Study: Belmont ‘City of Opportunity’ ��������������������������������������  35 History����������������������������������������������������������������������������������������������   35 Facing a Crisis����������������������������������������������������������������������������������   36 Seeking Help������������������������������������������������������������������������������������   37 Researching the Market��������������������������������������������������������������������   38 Changing Perceptions ����������������������������������������������������������������������   38 Setting a New Direction��������������������������������������������������������������������   39 Imbedding the Vision������������������������������������������������������������������������   39 Empowering Management����������������������������������������������������������������   40 Launching the Brand������������������������������������������������������������������������   41 Implementing the Change ����������������������������������������������������������������   41 5 Work Book: Innovation in Small Firms��������������������������������������������������  45 5.1 Learning Objectives����������������������������������������������������������������������������  45 5.2 Chapter Review����������������������������������������������������������������������������������  45 5.3 Key Lessons����������������������������������������������������������������������������������������  46 5.4 Learning Activities������������������������������������������������������������������������������  47 5.5 Case Study Analysis����������������������������������������������������������������������������  48 Questions/Tasks��������������������������������������������������������������������������������   48 5.6 Case Study: The Stillroom; When Love Is Not Enough ��������������������  48 Love Grows��������������������������������������������������������������������������������������   49 From Little Acorns����������������������������������������������������������������������������   49 A Small Business Blossoms�������������������������������������������������������������   49

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Corporate Structure��������������������������������������������������������������������������   50 Financial Management����������������������������������������������������������������������   51 The First Agency������������������������������������������������������������������������������   51 Success: Gift Fairs and Exports��������������������������������������������������������   52 New Commercial Premises and Production Methods����������������������   52 Mother’s Private Investment ������������������������������������������������������������   53 Factoring to Finance Debtors������������������������������������������������������������   54 The Age of Discontent����������������������������������������������������������������������   54 History Repeats Itself������������������������������������������������������������������������   55 Taxation��������������������������������������������������������������������������������������������   55 Accounting Alternatives��������������������������������������������������������������������   55 Partners’ Drawings����������������������������������������������������������������������������   56 Finance for the New House��������������������������������������������������������������   56 Business Improvement Program ������������������������������������������������������   56 Change from Fixed to Variable Costs ����������������������������������������������   57 Accounting Problems������������������������������������������������������������������������   57 Export Manager��������������������������������������������������������������������������������   58 Investor Sought ��������������������������������������������������������������������������������   58 Business Valuation and Possible Sale ����������������������������������������������   58 Direct Marketing and Franchising����������������������������������������������������   59 Business Management Pressures������������������������������������������������������   59 Repayment of Loans ������������������������������������������������������������������������   60 Accusations and Mediation��������������������������������������������������������������   60 The Final Cut������������������������������������������������������������������������������������   61 Reference ����������������������������������������������������������������������������������������������������  61 6 Work Book: Adoption and Diffusion of Innovation��������������������������������  63 6.1 Learning Objectives����������������������������������������������������������������������������  63 6.2 Chapter Review����������������������������������������������������������������������������������  63 6.3 Key Lessons����������������������������������������������������������������������������������������  64 6.4 Learning Activities������������������������������������������������������������������������������  65 6.5 Creativity Journal Entry����������������������������������������������������������������������  65 6.6 Group Exercise: GENCO and RENKA����������������������������������������������  66 The Problem Outlined����������������������������������������������������������������������   66 Your Task Explained ������������������������������������������������������������������������   67 6.7 Case Study Analysis����������������������������������������������������������������������������  67 Questions/Tasks��������������������������������������������������������������������������������   68 6.8 Case Study: The Owen Gun����������������������������������������������������������������  68 The Australian Patent System ����������������������������������������������������������   69 War Breaks Out��������������������������������������������������������������������������������   69 Submachine Guns ����������������������������������������������������������������������������   70 Evelyn Nearly Gives Up ������������������������������������������������������������������   70 A Second Chance������������������������������������������������������������������������������   71 Trial by Fire��������������������������������������������������������������������������������������   71 Owen Gun Versus the STEN Gun����������������������������������������������������   72

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The STEN Arrives����������������������������������������������������������������������������   73 Going Political����������������������������������������������������������������������������������   74 Production Problems������������������������������������������������������������������������   74 Into the Field and Fame��������������������������������������������������������������������   75 References����������������������������������������������������������������������������������������������������  76 7 Work Book: Planning, Business Models and Strategy ��������������������������  77 7.1 Learning Objectives����������������������������������������������������������������������������  77 7.2 Chapter Review����������������������������������������������������������������������������������  77 7.3 Key Lessons����������������������������������������������������������������������������������������  78 7.4 Learning Activities������������������������������������������������������������������������������  79 7.5 Individual Research Paper������������������������������������������������������������������  79 7.6 Case Study Analysis����������������������������������������������������������������������������  80 Questions/Tasks��������������������������������������������������������������������������������   80 7.7 Case Study: Comfort Homes��������������������������������������������������������������  81 Old Hands, New Roles����������������������������������������������������������������������   81 Slow and Steady��������������������������������������������������������������������������������   82 Minimise Overheads ������������������������������������������������������������������������   82 Home from Home ����������������������������������������������������������������������������   82 Better Building, Reducing Risk��������������������������������������������������������   83 Window of Opportunity��������������������������������������������������������������������   83 Marketing and Management ������������������������������������������������������������   83 Four Factors for Financial Success ��������������������������������������������������   84 Quality Control ��������������������������������������������������������������������������������   84 Future Directions������������������������������������������������������������������������������   85 Reference ����������������������������������������������������������������������������������������������������  85 8 Work Book: Risk Management in Innovation����������������������������������������  87 8.1 Learning Objectives����������������������������������������������������������������������������  87 8.2 Chapter Review����������������������������������������������������������������������������������  87 8.3 Key Lessons����������������������������������������������������������������������������������������  87 8.4 Learning Activities������������������������������������������������������������������������������  89 8.5 Case Study Analysis����������������������������������������������������������������������������  89 Questions/Tasks��������������������������������������������������������������������������������   90 8.6 Case Study: Robotics Pty Ltd ������������������������������������������������������������  90 Humble Birth������������������������������������������������������������������������������������   91 Dealer Network��������������������������������������������������������������������������������   91 Extended Credit Terms����������������������������������������������������������������������   91 Vertical Expansion����������������������������������������������������������������������������   92 Cash Surplus ������������������������������������������������������������������������������������   92 Enhanced Performance ��������������������������������������������������������������������   92 New Markets ������������������������������������������������������������������������������������   93 Costs��������������������������������������������������������������������������������������������������   93 Intellectual Property Protection��������������������������������������������������������   93 Body with No Brain��������������������������������������������������������������������������   93 Systems Lagged Behind Growth������������������������������������������������������   94

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Decreasing Liquidity����������������������������������������������������������������������   94 Product Profitability Re-examined�������������������������������������������������   94 Inefficiencies and Lost Orders��������������������������������������������������������   95 Search for Extra Funds ������������������������������������������������������������������   95 A New Beginning ��������������������������������������������������������������������������   95 References����������������������������������������������������������������������������������������������������  95 9 Work Book: Disruptive Innovations and the Commercialisation of Technology��������������������������������������������������������������������������������������������������  97 9.1 Learning Objectives��������������������������������������������������������������������������  97 9.2 Chapter Review��������������������������������������������������������������������������������  97 9.3 Key Lessons��������������������������������������������������������������������������������������  98 9.4 Learning Activities �������������������������������������������������������������������������� 100 9.5 Case Study Analysis ������������������������������������������������������������������������ 100 Questions/Tasks������������������������������������������������������������������������������  100 9.6 Case Study: Davies Craig EWP ������������������������������������������������������ 101 Solving the Problem of Engine Overheating����������������������������������  101 The EWP as an After-Market Solution ������������������������������������������  102 Racing Cars as an Initial Early Adopter ����������������������������������������  102 Vintage Cars as Another Niche Customer��������������������������������������  102 Offering Superior Performance������������������������������������������������������  103 References���������������������������������������������������������������������������������������������������� 104 10 Work Book: Screening Opportunities and Assessing Markets�������������� 105 10.1 Learning Objectives�������������������������������������������������������������������������� 105 10.2 Chapter Review�������������������������������������������������������������������������������� 105 10.3 Key Lessons�������������������������������������������������������������������������������������� 106 10.4 Learning Activities���������������������������������������������������������������������������� 107 10.5 Individual Research Paper���������������������������������������������������������������� 108 10.6 Case Study Analysis�������������������������������������������������������������������������� 108 Questions/Tasks������������������������������������������������������������������������������  109 10.7 Case Study: Nokia Sells Out: The Rise and Fall of Nokia Mobile Communications ������������������������������������������������������������������������������ 109 Nokia’s Rise to Global Dominance������������������������������������������������  109 Life Goes Mobile����������������������������������������������������������������������������  111 Enter the iPhone������������������������������������������������������������������������������  112 Enter Microsoft������������������������������������������������������������������������������  113 Exit Nokia��������������������������������������������������������������������������������������  114 References���������������������������������������������������������������������������������������������������� 114 11 Work Book: Team Building, Company Leadership and Strategic Alliances������������������������������������������������������������������������������������������������������ 117 11.1 Learning Objectives�������������������������������������������������������������������������� 117 11.2 Chapter Review�������������������������������������������������������������������������������� 117 11.3 Key Lessons�������������������������������������������������������������������������������������� 118 11.4 Learning Activities���������������������������������������������������������������������������� 120

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11.5 Creativity Journal Entry�������������������������������������������������������������������� 120 11.6 Case Study���������������������������������������������������������������������������������������� 121 Questions/Tasks������������������������������������������������������������������������������  121 11.7 Case Study: AQ2 Smartaflow������������������������������������������������������������ 121 Going Beyond a Good Idea������������������������������������������������������������  123 Recognising an Opportunity ����������������������������������������������������������  124 Proving the Technology������������������������������������������������������������������  125 Protecting and Leveraging Intellectual Property����������������������������  127 The Outcomes��������������������������������������������������������������������������������  128 The Role of Design in Commercialisation ������������������������������������  129 The Organisation of Design and Product Development ����������������  131 Planning for Product Development������������������������������������������������  132 The Evolution of a New Product Development Process����������������  133 The Use of External Design Services ��������������������������������������������  134 Strategic Partnering: Baker’s Junction Machinery ������������������������  135 Outsourcing Graphic Design Services��������������������������������������������  137 12 Work Book: Financing the Venture���������������������������������������������������������� 139 12.1 Learning Objectives�������������������������������������������������������������������������� 139 12.2 Chapter Review�������������������������������������������������������������������������������� 139 12.3 Key Lessons�������������������������������������������������������������������������������������� 140 12.4 Learning Activities���������������������������������������������������������������������������� 142 12.5 Creativity Journal Entry�������������������������������������������������������������������� 142 12.6 Case Study Analysis�������������������������������������������������������������������������� 142 Questions/Tasks������������������������������������������������������������������������������  142 12.7 Case Study: Mt. Romance Australia Ltd������������������������������������������ 143 The Beginning of a Relationship����������������������������������������������������  144 Structure and Process of the Investment����������������������������������������  145 How the Venture Capital Process Shaped Mt. Romance����������������  147 Lessons Learnt from Both Sides����������������������������������������������������  148 Issues for a Regional Business�������������������������������������������������������  149 13 Work Book: Intellectual Property Management������������������������������������ 153 13.1 Learning Objectives�������������������������������������������������������������������������� 153 13.2 Chapter Review�������������������������������������������������������������������������������� 153 13.3 Key Lessons�������������������������������������������������������������������������������������� 154 13.4 Learning Activities���������������������������������������������������������������������������� 155 13.5 Creativity Journal Entry�������������������������������������������������������������������� 156 13.6 Group Exercise: Professor M’s Dilemma ���������������������������������������� 156 The Problem Outlined��������������������������������������������������������������������  156 Your Task Explained ����������������������������������������������������������������������  157 13.7 Case Study Analysis�������������������������������������������������������������������������� 158 References���������������������������������������������������������������������������������������������������� 158

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14 Work Book: Social Innovation and Enterprise �������������������������������������� 159 14.1 Learning Objectives�������������������������������������������������������������������������� 159 14.2 Chapter Review�������������������������������������������������������������������������������� 159 14.3 Key Lessons�������������������������������������������������������������������������������������� 160 14.4 Individual Research Paper���������������������������������������������������������������� 162 14.5 Case Study Analysis�������������������������������������������������������������������������� 162 Questions/tasks ������������������������������������������������������������������������������  163 14.6 Case Study: Bendigo Bank, Tambellup and Cranbrook ������������������ 163 A Brief History ������������������������������������������������������������������������������  164 The Bendigo Community Banking Model ������������������������������������  164 Getting It Going������������������������������������������������������������������������������  165 Working Together ��������������������������������������������������������������������������  166 A Painful Process����������������������������������������������������������������������������  166 The First Year����������������������������������������������������������������������������������  168 Four Years of successful Operation������������������������������������������������  168 Appendices��������������������������������������������������������������������������������������������������������  171 Appendix A – Work Book: General Measure of Enterprising Tendency (Version 2) ��������������������������������������������������������������������������������  171 Introduction������������������������������������������������������������������������������������  171 Instructions for Completing Test����������������������������������������������������  171 Questions����������������������������������������������������������������������������������������  172 Answer and Scoring Sheet��������������������������������������������������������������  174 How to Score Your Responses��������������������������������������������������������  174 What Scores Measure ��������������������������������������������������������������������  175 Calculating Your Score ������������������������������������������������������������������  175 Interpreting Your Score������������������������������������������������������������������  176 Appendix B – Work Book: Diagnosing Your Innovation Management����������������������������������������������������������������������������������������������  182 Introduction������������������������������������������������������������������������������������  182 The Nature of Innovation Within Your Firm����������������������������������  183 Appendix C – Work Book: Action Learning Project in  Commercialisation ������������������������������������������������������������������������������������  191 Introduction������������������������������������������������������������������������������������  191 The Action Learning Approach������������������������������������������������������  191 Recruiting the Project ��������������������������������������������������������������������  192 Assessing the Project – The Innovation Diagnostic Report������������  194 Action Learning Task 1: Assessing the Strategy and Market Case ����������������������������������������������������������������������������  204 Developing the Business Model – A Check List����������������������������  204 Developing the Market Strategy – A Check List����������������������������  206 Action Learning Task 2: Assessing the Resources and Innovation Case������������������������������������������������������������������������  213 Developing an IP Strategy – A Check List ������������������������������������  214 References���������������������������������������������������������������������������������������������������� 215

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Work Book: Entrepreneurship as a Social and Economic Process

1.1

Learning Objectives

After completing this chapter, you should be able to: • Appreciate the importance of entrepreneurship and innovation to a healthy economy. • Define the key terms: entrepreneur, entrepreneurship and innovation. • Understand the difference between managers, entrepreneurs and entrepreneurial managers. • Understand the concepts and key theories relating to entrepreneurship. • Understand policy tools employed to encourage entrepreneurial activity.

1.2

Chapter Review

This chapter has examined the nature of entrepreneurship and innovation, providing definitions for both and placing them into context. Note that entrepreneurship is a major driver of employment and economic growth throughout the world. Entrepreneurship operates at the individual, organisational and environmental level, and is a process associated with self-evaluation, opportunity recognition, the active management of resources, and the capacity to reassess and change. Unlike managers, the entrepreneur is willing to assume the risk associated with ownership of a venture, but also enjoys the rewards of success. Innovation is an integral part of entrepreneurship and involves either product or process innovations that can be incremental, synthetic or discontinuous in nature. Innovation is a major source of competitiveness for firms and is essential to success in modern economies.

© Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_1

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1.3

1  Work Book: Entrepreneurship as a Social and Economic Process

Learning Activities

1. Using examples, explain why entrepreneurship and innovation are considered important to a healthy and growing economy. 2. Define the terms enterprise, entrepreneur, entrepreneurship and innovation, providing a brief example of each from your own experience. 3. Explain the difference between an entrepreneur and a manager. Is it possible for there to be such a thing as an entrepreneurial manager? What characteristics might such a person have? 4. If you were to provide advice to the government about how to foster more entrepreneurial behaviour and innovation within the economy, what strategies would you suggest?

1.4

Key Lessons from the Chapter

• Entrepreneurship and innovation are now recognised as being among the key elements in the process of economic development. • Necessity entrepreneurs are those who enter self-employment out of a lack of choice, by contrast, the opportunity entrepreneur is a person who follows a specific idea or opportunity out of choice that they have identified as delivering benefits. The opportunity entrepreneur is more likely to be found in developed economies. • An entrepreneur exhibits four characteristics: 1. An entrepreneur is an agent of change bringing new ideas or products to market with the ability to create wealth and employment. 2. An entrepreneur has individual motivation and the capacity to identify an opportunity and pursue it to economic success regardless of the resources that are under their control. 3. An entrepreneur converts opportunities into marketable ideas, often assuming risks, implementing the idea and realising any rewards. 4. An entrepreneur is often found starting a company of their own (entrepreneur) or working in an organisation on a new project (intrapreneur). • The domain of entrepreneurship comprises at least seven elements. The first three involve the recognition, exploration and exploitation of future opportunities. The next four comprise the creation of new ventures, the creation of new products or components, the creation of new markets or even industries, and the creation of wealth. • Sources of innovation can come from some or all of the following: unexpected occurrences, incongruities, process needs, industry and market changes, demographic changes, changes in perception, new knowledge (Drucker 1985). • Most National Innovation Systems comprise two broad elements. The first is a common innovation infrastructure. The second is the cluster specific environ-

1.6  Case Study Analysis

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ment for innovation with five distinct functions: the creation of new knowledge; focusing of research processes within the national scientific community; ­facilitating access to resources and funding; facilitating the development of positive externalities; and facilitating market creation and development. • The OECD (2010) suggests that innovation is a potential key to solving many of the world’s problems, including climate change, poverty and economic stagnation.

1.5

Exercise: Profiling Activity

Profile an entrepreneur that interests or inspires you. Many high-profile entrepreneurs feature prominently in the media, and you can often find out a lot about them from published sources. Where possible you might also make direct contact with them or their business venture and seek information. Consider the personal characteristics of the individual, their background in terms of family, education and experience, the business environment when they launched their venture, the type of venture, and their current management style. Your profile should be no longer than 2 × A4 pages in length (approximately 400 words).

1.6

Case Study Analysis

Read the following case studies of small entrepreneurial firms within the Asia Pacific region, and then address the questions that follow.

Questions/Tasks 1. What are the common lessons emerging from these four entrepreneurial cases? (a) Analyse their respective success factors and develop a composite list. 2. Can you identify any common barriers to success within these firms? (a) Consider how many of these are related to managerial, market, regulatory, financial, cultural, and physical or other factors. 3. What are the differences between these firms and are they based on country, industry or some other factors? 4. What is the role of the entrepreneur in each of these cases? 5. What do these cases suggest may be a role for government? 6. What do these cases suggest as to the use of technology to assist small firms to engage in global markets?

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 ase Study: Small Entrepreneurial Firms in the C Asia-­Pacific Region

The following case studies outline examples of small, entrepreneurial firms in the Asia-Pacific region and how their founders have grown these companies.1 They provide some evidence of how entrepreneurial activity can operate across different countries and industry sectors. You should read these cases with a view to identifying the main lessons that they offer about the factors that influence the start-up, growth and sustainability of small firms. This includes the factors motivating their founders to start-up such ventures, and the things that must be addressed if a new-­ business venture is to survive and prosper. Take particular note of the things that are common across all these cases and what factors are inherent in the founders, internal to the ventures, and impacting them within their respective markets, industries and overall external task environments. Also, take particular note of how technology and innovation in product, service or marketing activities help these firms to succeed.

Unirex Kabushiki Gaisha, Japan When Mr. Ryuichi Hiraiwa was made redundant, the 54-year old native of Hakkodate, Japan, didn’t want to retire, and he felt an obligation to provide work for many of his former colleagues. So, he founded Unirex Co Ltd. in his hometown, Sapporo, hoping to capitalise on their accumulated experience by exploiting the opportunities which the management of their previous companies had failed to take up. From the beginning, the focus of Unirex was export, primarily to China but also to Germany and Hungary. Unirex now has an annual turnover of US $2.96 million, with overseas sales now accounting for nearly 20% of total revenue. The company offers a range of products that have been developed through the reworking of existing technologies for new clients or industries. Several of these have worldwide patents, and are world best-practice technologies, including: • Bio Coal technology, which produces clean-burning, high-energy briquettes from low quality brown coal. • Cadmium Removal technology, used to remove the cadmium deposits which are a by-product of the scallop industry. • Electric Cold Food Smoking equipment, which drastically reduces the duration of existing methods. The company sees a wide and growing customer base (currently nearly 100) as an important feature of its operations, but is also working with the giant Mitsubishi Corporation on Bio Coal technology, an initiative which may well account for 80%  These cases were sourced from the Asia-Pacific Economic Co-operation (APEC) Studies Centre, Singapore (APEC 2003). 1

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of all sales if it is successful. Most company employees are of a mature age and have limited IT experience. The management is aware of the need to both improve staff computer skills and upgrade the IT facilities. Unirex is keen to develop the IT skills of its staff and adopt an ecommerce capability. Factors Attributed to the Company’s Success

• The combined experience and skills of the small workforce. This includes both engineering expertise and the sales experience and customer network that Mr. Hiraiwa had developed, particularly in China, over the years. Similar links with large trading houses and government agencies have also helped. • Access to up-to-date technology. Unirex has established fruitful links with the research departments in several local universities and ploughs most of its profits back into long-term research and product development. • The company’s focus on quality and customer-responsiveness. Unirex relies on unique technologies and a reputation for excellence, and on strong customer relations rather than price-competitiveness.

Boots Online, Australia Eight years ago, a small Australian footwear retailer Boots Online ventured into the export market by offering a local product (R M Williams boots) via the internet. Today, export sales account for 90% of the company’s internet activity and 40% of its annual turnover of US $5 million. The owner-manager, Mr. Barry Michaels, had been running the business for 27 years, and is the only one of his firm’s employees with IT skills to manage the online export side of the business. He has worked in the IT industry and also runs a small computer business. Despite his lack of experience in exporting, he saw the internet as ‘a shop window to the world’. Prior to its venture into the export market, the firm’s inventories were variable, with low stock levels carried over the summer. Now, the demand from overseas customers buffers the local shop from such seasonal variations and allows it to carry the same level of stock year-round, thus benefiting domestic customers. The carrying cost is obviously greater, but this was more than compensated for by the increase in turnover. However, it has not all been plain sailing for Mr. Michael’s export venture, and he has had to overcome a number of real and potential barriers to growth. These include: • • • •

the imposition of taxes in some purchasers’ home countries; high freight costs; the use of stolen credit cards; and the limited computer skills of his employees, who are only trained in direct customer service.

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The business uses four computers, with one dedicated to the ecommerce function. The website currently accepts orders and provides customer service, and is partially linked with the overall business system. Payments, however, are still handled manually. A customer file is maintained for internet business, but not for local customers. Factors Attributed to the Company’s Success

• A unique, high-quality product, with a world-wide reputation and not easily available overseas. The boots are particularly popular in countries which share a cultural closeness with Australia (viz the UK, the US and Canada). • Access to an effective freight infrastructure which virtually guarantees 3-day delivery to customers in the UK or US, and 5 days elsewhere. • Prompt and efficient customer service. All customer queries are answered within 24 h, and customers may return boots if they are dissatisfied, provided they pay for the freight. (Less than 2% of sales are returned.) • Easy internet access, with competitive service providers offering reliable support, and acceptable levels of data security.

Electrical Components, Malaysia Electrical Components (EC), in the state of Selangor, Malaysia, is a typical Chinese, family-run small business, manufacturing AC capacitors for use in light fittings and electrical goods. Typical in the sense that its founders ran the business on intuitive management principles and relatively informal arrangements with customers and suppliers, while a second generation of family managers have later introduced information technologies and more professional management techniques. EC, which was established by two engineers 25 years ago, currently employs a staff of about 30 predominantly skilled and semi-skilled production workers. EC has been exporting for 10 years, and just achieved its highest annual turnover of US $1.3 million. The initial impulse to export was triggered by approaches from foreign manufacturers. One of EC’s greatest problems is procuring and retaining skilled staff, which often prefers the better wages and conditions offered by larger organizations. The other major challenge is to build up a distinctive brand reputation for the company’s capacitors, reinforced by the internationally recognised quality accreditations which are increasingly demanded by both local and overseas customers. Although declining from 10% to around 2% of company total turnover in recent years, exporting remains a key focus for the management, because of the higher margins it generates and because of a general urge to expand the customer base. Strong and sustained communication with overseas clients, electronically or preferably face-to-face, is seen as a crucial platform for such business.

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The company regards itself as a relatively sophisticated user of computer technology, and has achieved efficiencies in the areas of accounting and inventory control, production planning and control, and general information management and communication. The establishment of a company website has certainly improved communication with suppliers and customers, but as yet no transaction facility has been incorporated. The high costs of broadband connection represent another hindrance to the development of full ecommerce potential. Factors Attributed to the Company’s Success

• Internationally recognised quality certification on certain categories of its products has generated competitive advantage over local competition. • Low-interest, long-term government loans for purchase of quality control testing equipment have assisted this drive for quality. • A focus on expertise, planning and networking facilitates the rapid delivery of products to overseas customers. • Installation of business application software and adoption of internet technology has increased productivity and efficiency. • Government-sponsored seminars and trade fairs have provided networking opportunities and information on overseas manufacturers and customers.

Vjandep Pastel Bakeries, Philippines Ms. Eleanor Popera-Jose admits to a number of failed small-business ventures around the Philippines during her early life, as she and her young family followed her husband’s military postings. Finally, inspired by a series of dreams about her grandmother’s bun-making, she began baking her first Pastel products and hawking them around her neighbourhood in the remote Camiguin Island province; she started with capital of US $2.35, and her first day’s profits amounted to US $0.68. Today that business, Vjandep Pastel (VP), is worth an estimated US $49,000, employs 39 staff, has just opened its third branch, and boasts gross daily sales of US $1070. Ms. Popera-Jose and her husband Virgilio Jose are proud of their success, and readily pay tribute to the external support which has contributed to its growth: • A series of loans (from the Philippines Department of Trade and Industry, funded by the Asian Development Bank; a Spanish government development program in Camiguin; and the Land Bank of the Philippines). • Various government-sponsored training programs (in entrepreneurship, business management and good manufacturing practices). • Government-sponsored trade fairs and exhibits which have generated requests for distributorship of VP’s Pastel products in other regions. But such assistance is only beneficial if it is approached with the right attitude. They have doggedly pursued any potential government-sponsored assistance.

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Vjandep Pastel faces several challenges as it contemplates the further growth which clearly beckons. Only recently has it begun to computerise its financial and supplies inventory data, as well as establish a website for the business which it is still trying to link with an integrated website for Northern Mindanao businesses initiated by the Department of Science and Technology. Expansion, particularly into the export market, is an attractive proposition, but finance, distribution, technology and export knowledge and skills would all need to be improved. Factors Attributed to the Company’s Success

• Access to secure sources of finance proved crucial in covering initial start­up costs and later expansion plans. • Owner-operators took advantage of government-sponsored training programs to gain the necessary capacity to successfully manage and develop their business. • Government-sponsored trade fairs have proven to be effective networking opportunities. • Future expansion into the export market is viewed to be closely tied to access to finance and technology, as well as to additional training opportunities.

References APEC. (2003). Small business and trade in APEC: A report highlighting the contribution of medium, small and micro enterprises to the Asia Pacific region. Singapore: Asia Pacific Economic Cooperation (APEC). Drucker, P. (1985). Innovation and entrepreneurship. Oxford: Butterworth-Heinemann. OECD. (2010). SMEs, entrepreneurship and innovation. Paris: Organisation for Economic Co-operation and Development.

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Work Book: The Entrepreneur

2.1

Learning Objectives

After completing this chapter, you will be able to: • Examine the psychological and social trait theories of entrepreneurship. • Consider the environmental factors likely to trigger enterprising behaviour. • Complete an entrepreneurial assessment. • Relate theories of entrepreneurship to individual vocational and professional contexts.

2.2

Chapter Review

This chapter provides an overview of the characteristics that influence the entrepreneur and shape their behaviour. The factors influencing entrepreneurship are found both internally and externally to the individual, comprising a combination of personality traits and environmental influences. Entrepreneurs are typically characterised by strong achievement drive, high levels of creativity, a desire for autonomy, a willingness to take calculated risks, and an internal locus of control. These are key enterprising tendencies that are inherent in all people regardless of their background, age, ethnicity or personality. Entrepreneurs are not born; rather, they interact with their environment to apply their enterprise tendencies into entrepreneurial activities. Entrepreneurial motivation is triggered by the individual’s entrepreneurial orientation, personal goals and the opportunities available to them in their environment. The factors that influence entrepreneurial behaviour are the individual’s ability to recognise opportunities and to act upon them, but also to learn from their experiences and to undertake realistic self-evaluation. Each stage of our lives presents © Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_2

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different opportunities for entrepreneurial behaviour. Individuals develop personal theories of what they can achieve, and they then shape these through their active learning and their pursuit of ambitious goals. Their confidence and self-belief are critical to entrepreneurial activity. The GET test is a measure of enterprise tendencies, and can be useful to help people evaluate their own life history and capacity for entrepreneurship. Entrepreneurial orientation is a measure of the level of innovativeness, pro-activity and risk-taking proclivity inherent in an organisation. Managers need to encourage entrepreneurial orientation within their firms. Finally, while entrepreneurship can have many benefits, it can also have a dark side, which is characterised by overwork, stress and risk. There can be risks to career, family and social relationships, as well as to the psychological well-being of the entrepreneur.

2.3

Key Lessons

• Although some personality related characteristics or traits appear to be strongly associated with entrepreneurs, they usually need to be placed into an environmental context and linked to a triggering event. • Following entrepreneurial traits are often mentioned: recognising and taking advantage of opportunities, resourceful, creative, visionary, independent thinking, hardworking, optimistic, innovative, willing to take risks, able to provide leadership for others. Despite the emphasis on trait theories in entrepreneurship research, this approach has been criticised. • Motives for starting a new venture include the desire for autonomy, for feedback, greater financial returns, the desire for completion of a task, and the identification of unexplored opportunities. • When examining why individuals start new ventures and how they differ from those who do not, motivation is a critical component to be considered. • Entrepreneurial behaviour is therefore a personal choice to initiate the process of establishing a venture and thereby changing the state of the market in some way. • There is no ideal age for an entrepreneur, or for anyone, to start a new business venture. • Research shows that entrepreneurship is not something that you are born with; it is a choice that lies within the ability of every person. We all have the primary enterprising tendencies of achievement drive, creativity, desire for autonomy, risk-taking proclivity, and locus of control. These are not personality traits; rather, they are orientations that are shaped by our life history. • It is possible for managers and their organisations to possess an entrepreneurial orientation, which has been defined as the processes, practices and decision-­ making style of an organisation that acts in an entrepreneurial way. • Not all business discontinuance results in bankruptcy, but entrepreneurs typically take on significant financial risk where they put a significant portion of their savings or financial resources at stake, that will be lost if the venture fails.

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• Other risks facing entrepreneurs are those relating to their career, family and friends and psychological health.

2.4

Learning Activities

1. Using examples, discuss whether you think that entrepreneurship is influenced more by inherited psychological traits or by external environmental factors. 2. Drawing upon the entrepreneurial profiling activity from Chap. 1; form a group and compare findings, discussing the personality, social and environmental contexts and motivation for entrepreneurial activities among the profiled entrepreneurs. What does this tell you about the influences of personality and environment? 3. Complete the GET test (see Appendix A) and score your results. Consider your results against your own personal situation, and examine what influences family, career and personality might have played in shaping your profile.

2.5

Exercise – Profiling Activity

Drawing upon the findings from the GET test and any group discussions you have held, address the following: • Which entrepreneurial traits do you recognise in yourself and your group? • Which attributes are valued by your employer or organisation? • Which attributes do you have little chance of developing in your current environment? • How could entrepreneurship be better encouraged in your organisation?

2.6

Creativity Journal

Creativity is a foundation for both entrepreneurship and innovation. To assist you in understanding the way that creativity works within these areas, you are encouraged to keep a creativity journal. The purpose of the Creativity Journal is to encourage regular reflection on the concepts presented and discussed in class. Entrepreneurial managers are both reflective and action oriented, they are able to critically evaluate situations and develop creative solutions to problems. Personal insights, observations and lessons learned provide valuable anchors during difficult decision-making times for many successful entrepreneurial managers. The Creativity Journal provides an opportunity for students to practice creative thinking and explore opportunities and challenges facing them in their own careers. The Creativity Journal aims to help students arrive at new insights into their entrepreneurial capabilities.

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The Creativity Journal is a semi-structured written assignment that provides evidence that you are able to apply concepts and frameworks presented in the course to your own work or vocational context. Entries in the Journal must demonstrate application of course materials to personal experience and observations, evaluation of those experiences and lessons learned. The Creativity Journal is not an unstructured personal journal although it can be written in an informal style. In the Creativity Journal, you are required to submit up to six self-assessment activities. Each entry should be two A4 pages in length with the final assignment limited to about 12 pages in length. The content of the Journal and an outline of the assessment activities can be discussed in class. The Creativity Journal will normally be submitted to your lecturer in the final week. An optional review for feedback can involve students submitting their Journals in the middle of the program or sharing their entries with others in their class.

Creativity Journal Framework Entry One  Your first journal entry is a statement of your entrepreneurial goals and your expectations for this course. Consider how entrepreneurship and innovation relates to you and your vocational experiences; write about how you might gain from studying these topics. Write about you own entrepreneurial and innovative experiences and apply your GET test results. For your first journal entry, consider the following: • How do you stack up against the five dimensions (e.g. achievement drive, creativity, desire for autonomy, willingness to take calculated risks, and internal locus of control)? • What do you need to develop or improve? • What is the organisation you work for (or an organisation you have worked for or know about) doing to attract and keep entrepreneurial talent? • How would you describe and evaluate the influence your working environment has had upon your entrepreneurial orientation? Entries two to five  These should discuss the activities set for you during the class that relate to the concepts, theory or practice from the readings for the topics covered. What you chose to write about should be meaningful to you and your vocational experience. Personal experiences may be drawn from your current work or study environment or previous work experience. In preparing these entries you should make reference to the course materials and the various readings, case studies, activities and any guest speakers that have been addressed during the class. Each case study or guest speaker is selected because they provide a relevant lesson for you in relation to the concepts and ideas being covered in the unit. While you have only limited space, these diary entries should demonstrate that you have read,

2.7  Individual Assignment – Am I an Entrepreneur?

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listened and reflected on the material covered in the unit. Higher marks can be allocated to students who can show a synthesis of the information at their disposal, not just a description. Entry Six  This entry should reflect on what you have learnt during the course, focusing on issues that were significant to you. This entry should revisit the GET test and describe any changes that have taken place over the 12-week program. This entry should also revisit your entrepreneurial goals and identify areas that you need to learn more about in order to work towards achieving those goals. Your learning expectations also need to be addressed in terms of whether these were met or not.

2.7

Individual Assignment – Am I an Entrepreneur?

The purpose of this assignment is to enable you as a student to gain first hand insights into the characteristics of entrepreneurs and to examine your own entrepreneurial capacity. The key tasks for this assignment are: 1 . Examine the theory and practice of entrepreneurs. 2. Evaluate your own entrepreneurial orientation. 3. Compare your own entrepreneurial capacity with those of an entrepreneur. During the first phase of this assignment you will need to complete the General Enterprising Tendencies (GET) Test (see Appendix A). You will also need to compare you results with others in the class and read the literature disseminated during the classes to consider the nature of entrepreneurship and entrepreneurs. In the next phase you will need to identify a person you feel is an entrepreneur, interview them and have them complete the GET test as well. You will then need to compare their results and background story to that of your own before preparing a report in which you ask the question “Am I an Entrepreneur”? These people may be small business owners, the entrepreneur owner-leader of a larger firm or even intrapreneurs operating within government, industry or non-­ profit organizations. Before you select your targeted ‘entrepreneur’ it is important that you consider whether this individual truly is an entrepreneur. Prior to contacting these entrepreneurs, you must register with the lecturer who it is that you plan to interview. This is to avoid overlaps between students and to avoid annoying certain people unnecessarily. Having selected your targeted entrepreneur, you will need to contact them and undertake the preparation of an interview lasting up to 1 h. In this interview you should prepare an interview protocol to help guide you through the discussion. This should cover some of the following things relating to the person being interviewed: • Personal family and career history; • Business history and both its highs and lows;

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• Motivations for doing entrepreneurial things; • Personality characteristics, education, age and other individual traits, and • GET test results and why these might or might not explain their behaviour. You will need to ensure that sufficient information is gathered to allow meaningful analysis to be undertaken at a later date. Once you have completed your interview you will need to prepare comparative analysis. This will involve examining the similarities and differences that may exist between the entrepreneur and you. The GET Test may be used to provide a degree of empirical data to assist your analysis. Each case needs to be evaluated against the background of the material presented in the course. You should look for evidence from within your case as to common problems facing the entrepreneurs  – e.g. raising finance, marshalling resources, developing capability and seeking to encourage others to join them on their journey (e.g. leadership). You should also assess whether you might be suitable to try entrepreneurship for yourself. Use the literature made available in the unit, along with case studies, to triangulate your findings against what the theory and practice of entrepreneurship suggests might be the behaviour of enterprising people. Your interview with the entrepreneur should allow you to address the questions: what makes an entrepreneur, and what would it take for you to become an entrepreneur?

Writing the Assignment The written assignment should not exceed 2500 words, excluding appendices and the reference list. Key areas that will be assessed and of equal value include: • Discuss what entrepreneurship means to you (drawing on theory and frameworks presented in class and personal experiences); • GET test for self-assessment – include as an appendix; • Discussion of your own assessment across the five entrepreneurial dimensions, social and environmental influences; • Interview summary with the entrepreneur that you admire (undertake GET test); • Analysis of the entrepreneur’s traits, family, social, economic and environmental influences; • Comparison of GET test results of entrepreneurs with your self-assessment; • Draw conclusions on entrepreneurship and you.

2.8

Case Study Analysis

Read the following case studies of entrepreneurs and consider what lessons these cases may have for you in understanding the mind and action of an entrepreneur. Address the following questions:

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Questions/Tasks 1. What common patterns of thought and action emerge from these case studies? Make a summary. 2. Using the information from these cases, critically assess the conceptual frameworks relating to entrepreneurial behaviour and entrepreneurial orientation outlined in the chapter. 3. What do these cases teach you about the mind and actions of entrepreneurs?

2.9

Case Study: Lessons from Entrepreneurs

Author: Tim Mazzarol This case study is based on a research project undertaken at the University of Western Australia (UWA) of the personal experiences of 50 entrepreneurs. What follows is a summary of the lessons learnt from this research, which provides an insight into the challenges faced by those who seek to pursue their goals via entrepreneurial behaviour. You should read these little case examples and make notes of any common features that they demonstrate about the motivations, attitudes and mindsets of entrepreneurial people. Make particular note of how they do, or don’t, demonstrate the characteristics of the “entrepreneur” as outlined in Chap. 2.

Case Study: Brian Brian is the founder and CEO of a small recruitment and HR services firm. He claims to have made many mistakes in his business career which involved lots of financial costs. Despite these setbacks, Brian remains optimistic saying: … ‘If you are not making mistakes, you are not learning.’

On previous business venture Brian launched ended in failure. He attributes this to not getting the ‘people fit’. Brian explained that he knew the partners he had gone into business with were not quite right, but he thought he could solve this by sheer hard work. This was not the solution because one of the partners lacked the same level of passion and commitment to the venture that Brian did, leaving him with too much burden to carry. The key things he now seeks to avoid in employees and business partners are selfishness, poor ethics and the tendency to panic in a crisis. Brian’s approach to business decision-making can be summed up as: … ‘Know your numbers, know your customers and have the courage to live your dream.’

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The key lessons Brian feels he has learnt from his business life are: • Realise that making mistakes is simply part of the learning process. • Make sure that you select your business partners carefully to ensure that they hold the same values as you, particularly their commitment and passion for the venture. • Build your company around good people and take care to select those who are good team players. • Focus on measuring the performance of the business. • Focus on understanding what your customers’ needs and wants are. • Have courage to fulfil your vision.

Case Study: Andrew Andrew is the founder and CEO of a small property development company specialising in property project management. He says he was always passionate about property. His early career was as a project development manager where he learnt his technical skills. At the time he launched his venture Andrew said he had, … ‘a high mortgage and a modest income, two kids and risk averse wife.’

According to Andrew, this combination of financial and family pressures meant that he missed many potentially good business opportunities. However, he eventually took the plunge and sunk $10,000 that he had borrowed from a friend into a property deal. As he says: … ‘I put my balls on the line and I thought – I am just going for it.’

The investment paid off handsomely and allowed him the capital to establish his business with partners. Andrew feels that a key to his success is his ability to forge strategic alliances, plus the way he has set up an innovative business model that focuses on ‘rezoning’. This seeks to pinpoint sites zoned at lower levels and moves them up the hierarchy through rezoning. This requires highly developed skills in negotiation due to the need to deal with local governments planning departments. Andrew nearly lost his business in the global financial crisis of 2007–2009. There were massive drops in property values and the banks were refusing to lend. He had to take up a full-time salaried job for a while to keep the doors open. However, he has now bounced back with new projects that have paid off and he is once again focusing on growth.

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Andrew likes to formalise his goals as he explains: … ‘Writing down your goals actually gives you your goals. Just writing it down actually makes it happen – it is like making a promise to yourself.’

In assessing his own abilities, Andrew feels that his key strengths are clear goal setting, having a positive frame of mind, forming key strategic alliances, and continuous innovation. On bankruptcy and business failure, Andrew has a philosophical view: … ‘I have self-belief that no matter what happens there will always be opportunities. You don’t always need money to do them, but it helps a lot.’

The key lessons Andrew feels he has learnt from his business life are: • Follow your passions. • Commit your goals to paper and make a promise to yourself to achieve them. • Have self-belief. • Make your own opportunities.

Case Study: Jim Jim is the founder and Managing Director of small engineering firm specialising in project management, process plan design, general engineering design and related consultancies for the minerals and metallurgical processing industries. The business is headquartered in Australia but services clients such as BHP-Billiton and De Beers at the international level with operations in South Africa. Jim’s initial entry into his own business occurred in the mid-1980s in Thailand. Unfortunately, this venture failed and resulted in bankruptcy. He returned home and worked as a salaried manager to regroup and rebuild his financial strength. Reflecting on this early failure, Jim attributes the primary cause to, … ‘ad hoc or nil business planning.’

Jim launched his existing business out of necessity when he found himself made redundant in the late 1990s. He wrote the business plan for his new venture ‘over a single weekend’, but he felt that he now had a clear sense of direction as to where it was heading. Since founding the firm Jim has sought to involve business partners to join him. He recognises the need to secure a strong management and technical team in order to assist with future growth.

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The key lessons Jim feels he has learnt from his business life are: • • • • •

Planning is valuable. Failure in business is nothing more than an opportunity to learn. The business model is more important than the documented business plan. Have a clear vision for how the business model will work. Look to surround yourself with good people who can complement your skills and share the load.

Case Study: Peter Peter is the founder and CEO of a software development company that has an innovative range of products that supply mine planning software for open pit and underground mining operations. The company has operations in Australia, India, Indonesia, Sri Lanka and the Philippines. Prior to launching his business venture, Peter had a career as a civil engineer working for the government in road construction as well as for a large coal mining company. The impetus for the business venture sprang from a research project Peter undertook in conjunction with a local university. This aimed at developing a mine planning software package. The project proved successful and Peter sought initial assistance from the university, who took him into a business incubator with computer support and rent assistance. According to Peter, he made no money in the first year of trading as he was forced to sell his house to raise the capital required to invest in the new venture. Peter explained that he made this decision because he was passionate about the new product and believed in its success. His business was an early entrant into the mining software market, which grew rapidly, and he soon found himself up against new competitors. Over time, these aggressive new competitors eroded the initial market share that Peter’s company had built. This loss of his ‘first mover advantage’ was attributed to his paucity of marketing skills and acumen: … ‘We were technically far superior … we were so engrossed in it (developing the software) that we didn’t see what was happening around the corner.’

Peter’s business steadily lost market share, forcing him to sell his equity to new owners. They refinanced the business and kept him on as CEO to help make the transition to a new management team.

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As an inventor Peter continues to be active, and was developing new vehicle tracking systems for public transport at the time of our interview. He explained that he had ‘nearly gone to the wall’ at least five times over the previous 35 years, but each set back only served to strengthen his will and make him more determined to complete the next project. Peter’s Christian faith was a source of strength for him in stressful times. As he explained: … ‘Sometimes you just have to believe in the impossible…and you’ve got to have faith to break through.’

The key lessons Peter feels he has learnt from his business life are: • Collaboration with research centres such as universities can pay dividends. • Innovation offers a first mover advantage, but marketing is more important than R&D. • Belief in yourself and faith are crucial.

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Work Book: The Entrepreneurial Process

3.1

Learning Objectives

After completing this chapter, you will be able to: • • • •

Consider the role of creativity in entrepreneurship and innovation. Understand the entrepreneurship process. Understand the theory of effectuation. Understand the factors likely to trigger or serve as a barrier to entrepreneurial activity. • Understand the new venture screening process. • Understand the role of creativity and how rich pictures can be used to stimulate creative thinking. • Understand the application of applied creativity tools to solving complex problems.

3.2

Chapter Review

This chapter has examined the entrepreneurial process which is comprised of three distinct stages: (i) opportunity recognition, (ii) marshalling resources, and (iii) developing capability. The screening of opportunities is a key part of the entrepreneurial process, and the reason why some people identify opportunities better than others may be due to their having access to better information channels and the cognitive abilities to assess and value them. When faced with uncertain, ambiguous environments, nascent and novice entrepreneurs are more likely to use an effectuation process than a causation one. The theory of effectuation suggests that they will plan forward, not by trying to maximise profit and return on investment but by assessing affordable loss and acceptable © Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_3

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risk. They will forge strategic alliances and use these to replace competitive analysis. Their success will be based on the exploitation of contingencies rather than the exploitation of pre-existing knowledge, and they will seek to control an unpredictable future instead of trying to predict an uncertain one. The business plan or planning process lies at the heart of the entrepreneurial process but is less a document than a balancing of opportunity, resources and team capabilities using creativity, communication and leadership skills. The entrepreneurial process can be understood as the interplay between opportunity, resources and the creation of a team that can implement the business plan. When screening future opportunities a useful tool is the ‘3M analysis’ that examines market, money and management issues. The factors likely to trigger new venture creation involve both personal and environmental issues. Key trigger factors are likely to be creativity and autonomy, while major barriers might be fear of risk, lack of finance, and finding the task more difficult than anticipated. Creativity appears to be a major driver for entrepreneurs and involves a process of accumulating knowledge, incubating this knowledge, generating ideas and evaluation and implementation. Creativity within the workplace can be affected by time pressures. Useful applied creativity tools include the use of ‘rich pictures’ to stimulate group thinking, and the SIMPLEX applied creativity process that provides a step-wise approach to addressing complex problems that require divergent, creative thinking before you can apply convergent planning and implementation.

3.3

Key Lessons

• The three principal components defining the entrepreneurial process are: opportunity recognition, marshalling of resources, developing capability. • The four principles of effectuation theory are: (i) Affordable loss, rather than expected returns; (ii) Strategic alliances, rather than competitive analyses; (iii) Exploitation of contingencies, rather than pre-existing knowledge; and (iv) Control of an unpredictable future, rather than prediction of an uncertain one. • On the contrary, a causation process implies a clear sense of the variables that need to be controlled in order to achieve a given outcome in a cause-effect logic where investment of time and resources in a project will lead to relatively predictable outcomes. • Causation processes work well in static, linear environments in which there is an underlying logic that, if the future can be predicted, it can be controlled. By contrast the effectuation process is more suitable where the variables are unknown or unpredictable. • 3M analysis focuses on the three M’s and offers a useful checklist for managers and entrepreneurs: 1. Market: What is the customer need? (product or service, size, structure, market growth rate, market share attainable, barriers to market entry?);

3.4  Learning Activities

•

•

•

•

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2. Money: What is the investment requirement? (fixed and variable costs, gross profit margin, profit after tax, time to break-even, cash flow dynamics, ROI and IRR capital requirements?); 3. Management: Is there potential for value-adding? (control is there over resources, timing, room for error, exit strategy, composition of the team?). The key issues for consideration by anyone launching a new business venture for their idea are: 1. Does the entrepreneur have the required capability or experience to launch the business? 2. Why should anyone buy the product or service? 3. What might increase the chance of success and what gives the new venture a competitive edge (unique selling proposition)? 4. Can the entrepreneur run the venture alone or do they need assistance? 5. Is there sufficient capital for sustained growth? 6. Will the venture yield an acceptable return? 7. Is this really the venture the entrepreneur wants to run? 8. Does the venture have a future? Triggers to new venture creation have been identified as: Creativity, Autonomy, Money, Market opportunity, Investment, Status. Barriers for new venture creation have been identified as: Hard reality, Lack of resources, Compliance costs. Analysis of these nine factors found that the most important for both the nascent and novice entrepreneurs was creativity. Of secondary importance were autonomy and money. Creative thinking includes four steps: knowledge accumulation, incubation phase, generation of ideas, evaluation and implementation. Creativity in the workplace is frequently killed by the everyday organisational structures and functions designed to maximise business effectiveness, efficiency and control. A creativity friendly management would: 1. Give room to divergently search for possibly relevant facts. 2. Encourage several viewpoints and beware of assumptions. 3. Avoid a negative attitude towards problems. 4. Share information and let people say what they think. 5. Look for the truth, not ways to boost egos.

3.4

Learning Activities

1. How creative are you and how much opportunity do you have within your professional life to be creative? List up to five ideas that you can think of to enhance creativity within your own workplace. 2. Developing a relational perspective can enhance creativity. For example: • suitcase and trolley = suitcase with wheels; • copier and telephone = fax machine. 3. Working in a small group, consider all the possible functions for the following things:

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• chair; • the office ‘gossip’; and • a wire coat hanger. 4. Working in a group, list as many ideas for new business opportunities as you can (try to get a good long list). Now sort out the top three from a commercial perspective. Justify why these are your best choices. 5. Identify an issue or problem that you are facing at work or in your professional environment, and apply the SIMPLEX process. Try working within a group and ensure that you follow each stage. Keep notes on what you do, and identify challenges and problems you faced from within your organisation, your team or your own ability to play the role of generator, conceptualiser, optimiser and implementer.

3.5

Group Exercise: Creating Jobs and Economic Growth

This is a group problem solving challenge that provides you with an opportunity to review the content from Chaps. 1, 2, and this chapter, and apply their content to addressing a complex problem. Read the following problem and then in a group of other students, solve the problem. Further details of the task are found below.

The Problem Outlined The Global Financial Crisis (GFC) of 2007–2009 impacted most of the world’s economies. In the United State the unemployment rate reached 9.5%, although it was much higher in some communities. Over 14 million Americans were out of work and the economic recovery since the GFC was slow and largely jobless. In 2010, the U.S. President Barak Obama said: … Workers who are out of work – especially workers who are out of work for a long time – lose a good deal of their market-relevant human capital. Their networks of contacts that allow them to easily get and change jobs, their habits of punctuality, their workplace skills, and their self-esteem all erode. The long-term unemployed; especially, drop out of the effective labour force – and it is damnably hard to reattach them all to employment absent a full-scale World War II style inflationary boom.1

According to the US Census Department over the past decades few new jobs were created within the larger firms and most new jobs were created by new business start-ups. However, there is a very high rate of business failure or abandonment amongst these newly created ventures. In other countries, recovery from the GFC was also slow. However, new enterprise creations, including non-employing nano-­ businesses, were growing strongly in countries such as Australia, France and the

 “What to do about the unemployed?” The Economist online www.economist.com.

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United Kingdom, and new small firms were the most important source of new job creation (OECD 2018). Policy makers in the United States, as in many countries with similar economic conditions, want to stimulate the creation of new jobs and therefore reduce unemployment levels. They think that entrepreneurship in the form of small business start-ups may be the answer. The challenge is to find ways to stimulate the formation of sustainable new business ventures and to develop policies and strategies that might foster an entrepreneurial and innovative economy. A concern for policy makers is how to foster an entrepreneurial society and what strategies they might follow to stimulate economic growth and job creation via entrepreneurship.

Your Task Explained Working in groups, undertake a critical analysis of this problem. You should apply the Rich Pictures and SIMPLEX process for creative problem solving as outlined in this chapter. The group should follow these steps: 1. Each individual group member draws a picture of the present and future desired states. 2. Annotate drawings with five priority functions/features to shift from present situation to desired future state and rank in order of importance. 3. Within the group conduct a ‘round robin’ with each member putting priority functions/features to the group without evaluation or criticism. 4. Rank functions/features in order of importance. 5. Develop a problem statement that summarises the underlying causes of the problem. 6. Draw on material from the text, in particular Chaps. 1, 2, and this chapter, and other readings to help you build an evidence-based argument and follow the SIMPLEX process in applied creativity. 7. Prepare a final solution (approximately four pages) and present to the class.

3.6

Case Study Analysis

Read the following case studies of nascent and novice entrepreneurs Malcolm and Richard, who either launched or abandoned their plans for a new business venture. You should consider these cases for what they suggest about the process of entrepreneurship and what may serve to make one person start up a new venture and another not do so. When you have read the case address the following questions.

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Questions/Tasks 1. Review these cases against the material covered in this chapter, and relate their stories to the theories and concepts of new venture creation and the entrepreneurial process. 2. What might explain the reasons why one individual launched their new venture and another person abandoned their idea? 3. If you were to give advice to Malcolm about how to get a new venture launched, what would you suggest he do to help him develop the right mental attitude? 4. What recommendations would you give to Richard about what he should do to ensure the long-term sustainability and growth of his fledgling business?

3.7

Case Studies of Nascent and Novice Entrepreneurs

Author: Tim Mazzarol The following case studies profile the stories of two nascent and novice entrepreneurs. The first, Malcolm, is a nascent entrepreneur who planned to launch a new business venture, but didn’t follow through with his plans. The second, Richard, is a novice entrepreneur, who did proceed to launch and is now facing the challenges of keeping his business sustainable. These cases provide you with some insights into the factors that serve to trigger the start-up of a new entrepreneurial venture, and also those factors that act as barriers to this. Read each case carefully and consider them in the context of the material outlined in this chapter.

Case Study: Malcolm (Non-Starter): The Nascent Entrepreneur Malcolm is a 37-year-old who had dropped out of high school at the age of 15 and began a career in the Fire Department. From the age of 32, he worked as a technician servicing fire equipment in large buildings. While the hours were good and the work easier, his salary was low at $25,000 per  annum and, despite increased demands from his employer for him to take on more responsibility, they had not offered him any substantial increase in wages. Malcolm’s wife Sue is a manager in a fast food restaurant and was earning more money than him. This bothered Malcolm, but Sue became pregnant with their second child and was planning to quit her job. With one small child and a new baby on the way, Malcolm was keen to find a way to earn more money and replace Sue’s income.

 ast Business Failures P Malcolm and Sue were not without some previous exposure to new venture creation and the challenges of entrepreneurship. During the 1990s they had purchased a small lunch bar which they took over as going concern. Sue managed this business using her skills in the fast food industry. At the same time Malcolm had become

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self-employed as the owner-driver of truck. He invested around $10,000 in the vehicle and its on-road costs, and was guaranteed work as a sub-contractor for a large transport company. Unfortunately, these early business experiences were not successful. The lunch bar ran into financial problems, which Malcolm and Sue blamed on the previous owner who had inflated the annual turnover figures to get a better price at sale. The sales turnover from the lunch bar was not high enough to cover the overheads, and the couple were unable to draw an income from the business. With Malcolm’s trucking venture still not breaking even, they decided to close down the lunch bar and Sue returned to work as a manager for a fast food chain. Shortly after the closure of the lunch bar, the truck experienced serious mechanical problems. Unable to find the money to repair the truck Malcolm was forced to abandon his investment in the trucking venture and to return to work as an employee, taking the fire service technician’s job.

Spotting the Opportunity The opportunity that emerged for Malcolm was to start up his own business servicing the fire equipment in commercial buildings. His recent experience of working as a fire equipment service technician for a large equipment supplier meant that he had the skills to do this type of work. However, his past experience as a fireman had left Malcolm with a feeling that the way these systems were being serviced and the way advice was given to building managers about their operation could be substantially improved. Screening the Opportunity Malcolm felt that his new business venture in fire equipment servicing was feasible due to his past experience in and knowledge of the industry. This gave him confidence that there would be a large market, and he had already made contact with many potential clients. He estimated that it would require a minimum of $20,000 to purchase a small van and set it up with the right equipment and tools. A friend was also willing to provide him with space, at a nominal rent, for a small workshop and office in an industrial unit. Fired up by this idea, Malcolm enrolled in a small business start-up seminar run by a government small business assistance agency. He also approached his bank for finance. There were several compliance costs that Malcolm also had to consider, particularly professional indemnity, public liability insurance, and worker’s compensation cover. Malcolm spoke to his accountant, but did not prepare a formal business plan. The seminar for small business start-ups had given Malcolm some new ideas, including the need to do some market research. He felt he already knew his existing customers in his current job. He had also identified buildings within the city that either were not being serviced or were being poorly maintained. His friend, who had offered him the factory unit space, was also willing to give him all his business and to refer him to others.

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However, the only formal market research Malcolm had done was to ‘bounce’ his idea off one of the clients of the large equipment supplier and ask him if he would be interested in switching service contractors. The client refused and commented that Malcolm’s idea would not work as large firms would get the bulk of this type of business. This eroded Malcolm’s self-confidence and made him begin to question whether his idea was really feasible. Without a ‘big brand name’ backing him, would he be able to secure enough customers?

Abandoning the Opportunity Stunned by this early negative reaction from a potential customer, Malcolm began to experience the hard reality of getting his venture launched. Things finally came to a head when he went back to the bank to secure a business loan. Despite having reasonable equity in his house and Sue’s income to keep the family’s needs satisfied, the bank wanted more planning. The bank manager asked Malcolm to prepare a cash flow forecast and general business plan for his new venture before they would consider lending him the $20,000. This, plus the earlier customer rejection, made Malcolm begin to question the likely success of his planned venture and he became quite despondent. Faced with nagging doubts, the worry over the loss of Sue’s income once the baby was born, and his past history of business failure, Malcolm abandoned his plan. He now felt that he was not really able to launch his own business. While he was still planning to quit his fire equipment technician’s job and go back to better paid work as a sub-contract truck driver, he would not be an owner-driver. Malcolm felt a lack of self-confidence in his capacity to run his own business and to take on the risks associated with it.

Case Study: Richard (Starter): The Novice Entrepreneur Richard is a 32-year-old naval architect who established his own design business after working with an America’s Cup syndicate in the United States (US). The experience of working with some of the world’s leading yacht designers in the exciting atmosphere of the America’s Cup race was highly stimulating for Richard and gave him exposure to new ideas and innovations. Richard’s father had been a self-employed architect and a strong role model for him. This family background had left Richard with a strong desire to be his own boss and have control over his own affairs and destiny. His international experience had left Richard with the view that he was personally capable of offering a world class service. Having benchmarked himself against some of the world’s best designers, Richard wanted to place his own name forward in the market and naval design community rather than work under the brand name of an employer. He also felt that, by establishing his own business, he would be able to make more money.

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 he Opportunity Is Triggered T The trigger for Richard’s decision to found his own business was the completion of his contract with the America’s Cup syndicate. Although he was planning to return to Australia from the US, Richard was offered the opportunity to continue working with the American syndicate on a design project. This would ensure that he had sufficient work to allow him to make a living once back in Australia. Richard returned to Australia and set up his new naval architecture firm almost immediately. He established an office studio in his home in the port city of Fremantle. This allowed him to keep his overhead costs low and to maintain flexible working hours. The city of Fremantle was also a good place to keep in touch with local ship and boat building communities, and gave relatively easy access to Asia where future clients were to be found. Marshalling Resources The initial project work Richard secured from his former employer in the US took up around 40% of his time. He had been provided with a high-performance computer and internet equipment by the American client to enable him to service their project remotely. This ensured that Richard had quite low initial investment costs and was able to devote more time and money to building up the business. An added benefit was that his American client received his work via the internet and paid him via electronic banking in US dollars. Building Capability Despite his fast start, Richard realised that he could not rely on a single client forever and would have to expand his client base if he was to build a sustainable business venture. In building the business, Richard faced several challenges. First, the market for naval architects in Australia was limited. In his home town of Fremantle there were few if any jobs, and self-employment was his only realistic option. However, Richard’s area of expertise was in the design of luxury yachts, which was a highly specialised area. There was a strong local market for small leisure craft design, but this was already heavily supplied by designers  – many of whom did not possess formal qualifications in naval architecture. This meant that the local market was generally too small or lacking in sophistication for Richard to build a sustainable business. Instead he had to look overseas. If the Australian market was too small for Richard’s future business growth, he would have to look to clients in North America, Europe and Asia. As a designer of luxury yachts, Richard would need to target a niche and highly demanding target client base. Via referrals from his American key client and some personal networking, Richard had secured a few smaller contracts to do projects in Japan and France. He was able to deal with them on a daily basis via email, but wining new clients would require him to make long distance trips and hold face-to-face meetings. This travel would be a major cost for Richard’s new business to carry.

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Future Plans Richard’s new venture survived the first 2 years following its establishment. He was trading profitably due to the low start up and overhead costs, and he had managed to widen his range of clients. However, he remained concerned whether he could sustain his business over the longer term. As a sole operator, Richard found it difficult to complete his project work and also find the time to make lengthy overseas trips to attend industry events and meet with current and prospective clients. He had recently attended a major industry trade show but had not set up a booth there due to the high cost. The need to attend these large international trade exhibitions and showcase his work was recognised as a key marketing opportunity, but Richard had to weight up the high cost of such events against their likely return. Richard had not undertaken any formal business planning. He had not had to borrow money from a bank, and his start-up so far had been relatively easy as he had been so well supported by his former employer. As Richard considered his future options, he felt he might need to broaden his business into new markets. The design of large commercial fishing vessels was a field that he thought he might be able to secure work in. There was also a strong local market for this type of work. However, commercial fishing vessels are a very different segment of the market to luxury yachts. While it offered more secure work, the profit margins on such work were less than in the luxury yacht design market. He had done no formal research or assessment of this option. Richard also worried about his ability to manage a business over the longer term. After all, he was a highly trained specialist in the field of naval architecture. He felt he lacked the fundamental skills and knowledge of business that would be required to build this venture over time.

Reference OECD. (2018). Entrepreneurship at a glance 2018. Paris: Organisation of Economic Cooperation and Development (OECD).

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Work Book: Entrepreneurship and Innovation in Large Firms

4.1

Learning Objectives

After completing this chapter, you will be able to: • Understand the process of intrapreneurship. • Understand the difference between managers and entrepreneurial managers. • Understand the impact of organisational structure and culture on creativity and enterprise within the firm. • Examine human resources frameworks for encouraging intrapreneurship within large organisations. • Recognise the five key elements that create the innovative organisation. • Understand the challenges facing innovation in public sector organisations.

4.2

Chapter Review

This chapter provides an overview of the concept of intrapreneurship or internal corporate venturing which suggests that managers within large organisations can behave like entrepreneurs. The ability of large organisations to generate innovations is contingent on their ability to encourage entrepreneurial behaviour among their employees. Intrapreneuring is contingent upon an alignment between the individual’s ability to undertake entrepreneurial activities, and also the organisation’s characteristics. Innovative organisations need a strong market orientation, innovative leadership, non-linear strategic planning, flexible structures and a supportive culture. The structure and culture should be aligned to ensure that innovation can be fostered through freedom and creativity, but also implemented through efficient © Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_4

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production and distribution. Intrapreneurship can be risky for managers who need to behave as if they are risking their own money. Encouraging entrepreneurial behaviour within large organisations requires attention to be given to human resource management (HRM) systems with appropriate rewards, resources, management support, organisational structure and a risk tolerant culture. Within public sector and non-profit organisations, managers can also engage in innovative and entrepreneurial behaviour. Managers in these organisations face increasing pressure to innovate and find new ways to deliver services more cost-­ effectively. Innovation can be a useful tool for public organisations in shaping and implementing policy. In healthy public organisations, employees see innovation as a normal part of their job and find that new ideas are encouraged and supported. Senior managers within public organisations must overcome complacency, empower employees and communicate the virtues of innovation. They need to be willing to change, to build on firm foundations, have a clear strategic vision, and learn to shift mindsets as they actively encourage innovation.

4.3

Key Lessons

• Intrapreneurs inside the corporation or agency implement new ideas within the established organisation. The intrapreneur demonstrates a set of enterprising attributes in a wide variety of situations. • Fostering intrapreneurship among managers requires a focus on four key issues: 1. The organisational structure should provide a high degree of autonomy and discretion over their work, linked to the reward systems. 2. The organisation should have fuzzy boundaries that allow networking between employees and alliance partners from other firms. 3. The human resource strategies should seek to attract and retain achievement-­ oriented people with the ability to set their own goals and value independence. 4. The senior management of the organisation should be tolerant of failure and risk. • Organisations can ‘re-engineer their corporate thinking’ to encourage intrapreneurship by focusing on things such as the setting of explicit, mutually-agreed goals that allow employees to share the vision and align their work with the broader corporate strategy. • Failure is a prerequisite to invention, and organisations need to encourage risk-­ taking and learning from mistakes. Senior management should seek to tolerate failure as a natural process of learning. Failure tolerant leaders engage people and set good examples. They are prepared to admit their own mistakes and are non-judgemental, while being analytical – neither praising nor penalising.

4.4  Learning Activities

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• Ten principles for the successful management of an intrapreneurial new venture team within a large organisation: 1. Intrapreneurial team members must share a common dynamic vision. 2. The new venture team should be placed under a corporate advisory board with clear lines of reporting. 3. Senior management must receive frequent updates of how the project is going. 4. The venture leader should dedicate time and attention to the interaction with the larger corporation. 5. The corporation must give freedom to act to the venture team. 6. They should all realise that is both risky and uncertain as to how it will turn out. 7. Both parties should seek to maintain open and effective communication channels. 8. The entire venture team must be encouraged to participate in planning the business’ direction. 9. If a team lacks a ‘passion’ for the business and each other, it rapidly comes apart. 10. Compensation should be directly linked to venture success. • Four key problems with intrapreneurial corporate venture activity may appear: 1. Vicious circles in the definition process leading to reluctance to provide adequate resources. 2. Managerial dilemmas leading to friction between maximising growth and building functional capabilities. 3. Indeterminateness of strategic context and time horizon of ICV development 4. Perverse selective pressures exerted by structural context on ICV development. • Innovation and change programs within government agencies and non-profit sector organisations requires five behavioural attitudes: 1. Be willing to change 2. Build on firm foundations 3. Have a clear strategic vision 4. Shift mindsets 5. Encourage innovation

4.4

Learning Activities

1. As an intrapreneur and job seeker, draft three questions that you would ask a potential employer to determine whether their organisation supports entrepreneurial behaviour.

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2. Examine the organisation where you work or an organisation with which you are familiar, and then address the following questions: • How supportive is the organisation of entrepreneurial behaviour? • Assess the organisation’s strengths and weaknesses in relation to intrapreneurship. • How might the organisation change in order to make it more conducive to intrapreneurship?

4.5

Creativity Journal Entry

For your second journal entry, address the following: • Describe your approach to creative thinking and problem solving. • What factors act as barriers and triggers to your creative thinking process? • Select a problem that interests (or bothers) you or the group with which you work: 1. Examine the problem using the problem-solving process outlined in the chapter. 2. Describe the process that you used, how the process differed from your usual approach, and the outcomes and lesson(s) learned.

4.6

Case Study Analysis

Read the case study Belmont ‘City of Opportunity’, which outlines the story of a local government authority within the inner Perth metropolitan area in Western Australia during the late 1990s. It describes the challenges facing the city with a declining population and aging community. However, it also shows how the city’s mayor, councillors and senior executives, working with the local business community and residents, turned around the fortunes of their city by pursuing innovative and enterprising strategies. The case provides lessons, not just for government agencies, but for any large organisation that needs to undertake a strategic transformation using enterprising and innovative solutions. After reading the case, and reviewing Chap. 4, address the questions outlined below:

Questions/Tasks 1. What lessons does this case provide in relation to how large organisations can undertake transformational change using entrepreneurship and innovation? 2. How might these lessons be applied to your own organisation with respect to how people and processes can be changed?

4.7  Case Study: Belmont ‘City of Opportunity’

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3. Assuming that you are the senior management of the City of Belmont, prepare a strategy to continue the momentum into the next 5 years. In doing so, consider the major issues, both internal and external to the local authority, that would need to be addressed.

4.7

Case Study: Belmont ‘City of Opportunity’

Author: Tim Mazzarol

The City of Belmont is located approximately 5.8  km south east of the Perth central business district (CBD) in Western Australia. Covering a total area of 40 km2, the municipality encompasses the suburbs of Ascot, Belmont, Cloverdale, Kewdale, Newburn, Redcliffe and Rivervale. The western boundary of the city comprises 11 km of foreshore along the Swan River. To the northeast is the Perth domestic and international airport, which is located within the city’s boundaries. The eastern edge of the city contains the Kewdale freight terminal, the main railway terminals for Perth. Transport infrastructure within the City of Belmont is substantial, with 227 km of roads, including many major highways linking the airport and railway freight terminals to other parts of metropolitan Perth. Despite this industrial environment, the City of Belmont manages around 238 ha of parks and gardens, including the Ascot Racecourse (57 ha), which is the main horse racing circuit in Western Australia. In 2000, the city had an estimated population of 30,400 residents living in a total of 13,306 dwellings.

History Belmont’s river frontage with close proximity to the Perth CBD proved attractive from the earliest days of European settlement. In 1830, a parcel of 2000 acres along the river was granted to Captain F Byrne, who called the area ‘Belmont Farm’. John Hardey, who owned the adjacent ‘Grove Farm’, subsequently purchased this property. Horse racing commenced at ‘Grove Farm’ in 1848, and the area soon became the centre of Perth’s racing industry.

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The low-lying swampy nature of the land in Belmont proved unsuited to pasture and cropping, but soon attracted many of Perth’s earliest Chinese immigrants who established market gardens in the area. The City of Belmont traces its history back to 1898 when it was first identified as a separate municipality under the administration of a Road Board. In 1907, the Belmont Park Road Board was formed and remained the management authority until 1961 when the municipality became the Shire of Belmont. By 1911, the population of Belmont had reached 1088 people. During the twentieth century, the City of Belmont became associated with horse racing, industrial development, particularly brick making, and the airport. A predominately ‘blue collar’ community, Belmont attracted a mixture of residents including those associated with the racing industry, manufacturing, transportation and storage. The official crest of the City was a shield incorporating a brick kiln stack and cog (representing industry), wings (representing the airport), and a racing horse on a green background symbolising the public open space managed by the ‘City of Parks’, as Belmont was called.

Facing a Crisis By the beginning of 1994, the City of Belmont found itself facing a crisis. Having experienced steady population growth from 1898 to the 1970s, an examination of census data showed an alarming decline in population throughout the 1980s and early 1990s. From a high of around 35,000  in the mid-1970s, the population of Belmont had fallen to 26,592 by 1994. This decrease in population was threatening the closure of schools in the area and leading to a perception that the City of Belmont was in decline. Coupled with this fall in population was a growing concern among councillors that the city was suffering from many other problems including too much low-income housing, ‘scruffy’ streetscapes and high crime rates. There were even calls from some councillors to hold anti-crime rallies in the centre of town to raise public awareness of the problems. In addition to these concerns, Council also faced the external threat of amalgamation and loss of independence, as the State Government was considering the fate of several municipalities and the possible amalgamation of Belmont with adjacent municipalities was being mooted. The Council was being asked to demonstrate its viability with scrutiny of the municipality’s financial status, growth rates, asset to liability ratios, and debt levels. Against this background, the Council resolved that they had a problem. The Director of Planning prepared a report for Council stating that they had an aging and declining population and they needed to turn their attention to developing strategies to turn this around. There were numerous plans ‘on the table’ for major infrastructure projects. These included the Ascot Waters residential estate on the banks of the Swan River, the Redcliffe redevelopment, redevelopment of the area known as The Springs, the

4.7  Case Study: Belmont ‘City of Opportunity’

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Graham Farmer Freeway project linking Belmont to the Perth CBD, and upgrades of the Great Eastern Highway. However, the Council was experiencing difficulties in addressing such projects within the overall environment of decline.

Seeking Help It was recognised that the City of Belmont had many good things to offer, particularly if the major infrastructure projects went ahead. In July 1994, the Council gave specific attention to the issue of attracting families to the City of Belmont. One of the many initiatives that were agreed on by the Council was the need for a marketing strategy which involved Council, the business sector, and the general community to properly promote the City of Belmont for family living. It was recognised that local government in general had been slow in recognising the importance of promotion and marketing. Accordingly, the provision of resources for such an area of activity had been seen as secondary to other ‘traditional’ priorities – or in fact was ignored. The city’s management knew that, if there was to be more than a token effort in encouraging families into the area, it would need to compete with other municipalities. It was also realised that promotion and marketing required specialist expertise and that getting the right consultant to work with the Council was essential. A working group comprising senior managers and councillors was formed, and they spent a considerable amount of time with Council making the case that a significant sum of money would be required to get any benefit. Although the Council was entering ‘unknown territory’, and up until this time had never seriously marketed the city, there was a high degree of excitement and anticipation from this new challenge. An initial budget of $200,000 was allocated to market the city, and a tender was raised. The Council working group took formal presentations from a variety of marketing and advertising companies. This exercise proved particularly difficult. The Council working group had agreed that selecting the right partner was ‘absolutely critical’, but they had little experience of what to look for. Some of the firms that tendered were later likened to an aggressive ‘slick suits and pony tail brigade’ who claimed that they could ‘sell anything’. What the Council was seeking was a group they could trust to make effective use of this substantial funding allocation. However, the Council and management had agreed that they would ‘open their minds’ and be receptive to suggestions from these marketing consultants. It was recognised that this may require doing things differently to the usual local government way. The successful tenderer was finally selected because they had impressed the Council with the admission that they did not have an ‘off the shelf’ solution, but were prepared to work with the City of Belmont to achieve the objectives. While the Council thought that it ‘was in the starting blocks’ and would be soon running to the community with a new logo and brochure, the marketing consultants advised them of the need to undertake more preparation. They pointed to the need for an

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investigation of the situation, within both the municipal administration and its external environment. This required commissioning research to provide ‘hard data’ upon which to base future strategies, rather than basing them on anecdotes and individual perceptions.

Researching the Market The need for research was identified as a first step in the successful development of a future marketing strategy. Although the Council had experience of using ABS population statistics, it was less familiar with community perception studies. A team of university researchers were engaged to undertake a research study to investigate what the problems facing Belmont actually were. The research indicated that the key factors people considered when selecting a place to live, in order of importance, were: (1) crime and safety; (2) the living environment, e.g. parks, streetscapes and gardens; (3) shopping facilities; (4) cost of living, e.g. housing prices and local council rates; (5) provision of local government services; (6) proximity to other parts of the city; (7) availability of recreational and sporting facilities; (8) access to entertainment facilities; (9) access to schools; and (10) ethnic composition. Public opinion rated Belmont poorly on crime and safety, but well in terms of its parks. However, analysis of crime statistics showed that the City of Belmont – while it had crime – was not significantly worse than other inner-city municipalities and in some years, it was actually better than some more ‘up-scale’ areas. Real Estate Institute of Western Australia (REIWA) statistics showed that median house and land prices in the City of Belmont were approximately $10,000 below those of other inner-city municipalities. Another key finding was that a sizeable proportion of the community were unaware how close Belmont is both to the Perth CBD and to the river.

Changing Perceptions The Council were surprised at the findings of the research study. They had been under regular ‘attack’ by many interest groups who accused the city of being crime-­ ridden and of suffering from serious social problems. Several councillors had wanted to hold anti-crime rallies in the centre of the city. City management used these findings to calm down these councillors, pointing out that to hold anti-crime rallies was ‘like standing on the roof tops, shouting out  – we’ve got a crime problem!’ The possession of reliable research enabled the city management to dispel many misperceptions as to the reality of Belmont’s situation. It also served to empower the Council to deal with vocal community interest groups who could now have their views placed into a more accurate context. When claims were made regarding ‘how the situation is’, council and management were able to refer to the research data and

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point out that such perceptions were incorrect. It also gave both council and management greater confidence that the situation they faced was not so bad. For the staff of the council, the research offered encouragement and hope. Despite the difficulties facing the council, there were several positive developments on the horizon. The first of these was the planned construction of the Graham Farmer Freeway linking the western suburbs of Perth with the east. This major infrastructure development would sink a tunnel beneath the northern precincts of the Perth CBD and throw a bridge across the Swan River. The freeway would shorten the distance between Belmont and the rest of Perth. Also, in the early planning stages were a major upgrade of the city’s principal shopping plaza, the Belmont Forum, and a major new riverfront housing development, Ascot Waters.

Setting a New Direction These new and exciting developments, plus the findings from the research, laid the foundation for the City of Belmont to develop a coordinated strategy to set the municipality on a new path. A full day workshop was held to identify where the city might move to over the coming 5 years. Both management and councillors attended, and the research was used as a foundation to develop strategies for improving the council’s relationship with its community. This was a critical workshop as it engaged councillors in the planning process and ensured their ownership of, and commitment to, the process. Faced with the recognised need for change, the councillors embraced this workshop with enthusiasm and made strong contributions. The City of Belmont, which had called itself the ‘City of Parks’, was given a new brand image – ‘Belmont the City of Opportunity’ – along with a new logo and promotional material. A series of community-based strategies were developed to raise the profile of the City of Belmont, and to enhance the overall quality of life in the municipality. This common vision assisted Council and management with decision-­ making, putting everything under the ‘City of Opportunity’ banner and facilitating change.

Imbedding the Vision A critical management challenge was the need to undertake an internal culture change process targeted at the council employees, as well as at the Council itself. City management was advised by the consultants that, if such a process was not implemented, the money spent on marketing communications would be wasted and the overall strategy would fail. A 2-day ‘culture change’ program was designed for both office and outside staff at the City of Belmont. Designed and delivered by the marketing consultants, this program took several months to complete, as all employees had to be processed through the workshops. The purpose of this training was to change the perception of the municipal employees to their role. As with many local government agencies, the

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City of Belmont viewed itself as an administrator and regulator. The function of the council was seen as enforcing rules and regulations on the community, telling people ‘yes you can do this, or no, you cannot to do that’. It was recognised that, if the City of Belmont was to lead change in the community, it must shift its focus from that of an administrator and regulator to a community facilitator. As a facilitator, the role of local government is to work with the community to find the middle ground, frequently having to negotiate a win-win outcome between conflicting interest groups. Not all municipal employees were enthusiastic about these changes. Some were sceptical about the value of marketing and saw the entire process as a waste of time and money. However, commencing with the 2-day culture change workshops, the message of change and innovation was gradually imbued. Management was able to use the branding and marketing focus to communicate their commitment to seeing the City of Belmont serve as a facilitator of community change. The message was sent out loud and clear that, henceforth, the City of Belmont was no longer just an administrator and regulator. It was now going to attract new families into the area, facilitate development, and attract new business investment. The culture change program challenged the way management and staff dealt with their clients – both internally and externally. If focused on turnaround times for work and approvals, as well as greater delegation of authority in the building planning and health services areas. It was acknowledged by council management that such initiatives were essential if the municipality was to effectively service its community. This change of thinking had its biggest impact on the planning staff within the council. The ability for the local government to encourage development, change and entrepreneurship within the community was recognised as contingent on the planning function. Fortunately, the council’s Director of Planning was highly receptive to this view and embraced the change in thinking. Nevertheless, the process of change placed substantial burdens on the planning staff, who were required to spend significant time negotiating with community groups and communicating the vision of the council.

Empowering Management Against this background of internal organisational change, the CEO of the City of Belmont proposed to Council that what was needed was a review of the contracts of employment for senior management. His concern was related to the relatively high turnover of senior staff within the municipal authority, as well as the insecurity facing many senior managers who felt reluctant to take on ‘hard issues’ with powerful lobby groups in case it led to future intimidation. It was recognised that it could take around 6 months for a senior manager in local government to become fully effective in their job. A high turnover of staff would, therefore, have a negative effect on the capacity of the City of Belmont to implement its strategic plans. To overcome these problems, a series of 5-year performance-based contracts were negotiated for all ten of the most senior managers. These contracts provided stability among the senior management team. While generous, the contracts had ‘a real sting

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in the tail’, thereby making it difficult for senior managers to suddenly leave the city halfway through a critical phase of the change process. For the managers, the contracts offered security to enable them to see 5 years ahead, rather than be subject to the shorter-term cycles of 2–3 years normally associated with council elections. Although the relationship between management and Council at Belmont was good, it was considered desirable to enhance the security of the management team as the municipality entered an important period of change. It was felt that many local government managers operate in an environment of ‘arse covering’ to avoid future political intimidation from disaffected councillors or community groups. What was desired was for the senior managers to be able to plan over a reasonable time horizon, secure in their employment, and for Council to know that the same team would be there to see it through. Council was unanimous in its approval to re-instate all the senior managers for a further 5 years. The managers, who ‘got a good feeling’ that they could now tackle the challenges ahead as a team rather than as individuals, warmly received this.

Launching the Brand By February 1996, approximately 12  months after the first working group had formed to seek solutions to the city’s problems, the City of Belmont ‘City of Opportunity’ was ready to launch it new brand image. Preparations for the launch were professionally managed. Public relations teams were employed to coordinate media, and a major public event was staged which sought to engage many of the leading property developers and business people within Perth. Weeks prior to the public launch, approaches were made to key stakeholders throughout the city seeking ideas and listening to concerns. The Mayor was even provided with specialist training in public speaking image and media management over a period of several months to ensure that he could present a ‘polished’ image to the target audience. The launch involved television cameras, T-shirts bearing the new city logo, and a harpist to entertain the crowd. The public launch of the ‘City of Opportunity’ announced that Belmont was no longer willing to be viewed as a decaying, inner-city ghetto. It spoke to both the business and resident communities of a confident new vision in which the council would seek to engage these groups in a partnership of mutual benefit with the object of enhancing life within the city. Even hardened property developers who had previously been antagonists at times with the council expressed positive views of the launch. It was, they said, encouraging seeing the city government now had a vision and a sense of purpose.

Implementing the Change Over the period 1996–2000, the City of Belmont began to change. The Belmont Forum shopping centre was upgraded, the Graham Farmer Freeway opened, and new

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housing developments – Ascot Waters and Ascot Gardens – were established. In the suburb of Redcliffe, an urban renewal project witnessed the transformation of a previously depressed area. While such projects were largely independent of local government, the ‘City of Opportunity’ process that sought to make such developments as smooth as possible encouraged their progress. Senior management from the Belmont authority engaged with the major developers to address their needs, while seeking to facilitate any problems they might face with other stakeholders in the community. Following the development of a clear strategy for the ‘City of Opportunity’, Belmont designed a series of programs to address specific problems or issues. Among the most critical was the public perception that the City was facing a crime wave. To address this, a community action strategy was developed, which included the contracting of a security company to provide regular security patrols throughout the residential and commercial areas. The security patrol service was working with police to identify and monitor ‘hot spots’. Response times were generally around 6 min. More street lighting was provided, and youth programs were established to assist dysfunctional families and youth at risk. A full-time youth liaison officer was employed to facilitate this process. In addition, the City supported the establishment of neighbourhood watch committees and launched an anti-graffiti strategy. One of the most high-profile initiatives launched by the Council was the establishment of a skateboard park adjacent to the Council Chambers in Faulkner Park. The Council viewed its role as one of community liaison rather than law enforcement. In the area of planning, the City of Belmont adopted a policy of ‘integrated planning’ in which environmental management would become a major focus for new initiatives. Engineering projects launched by the council focused on the provision of underground power, the protection of heritage buildings, and the enhancement of streetscapes to provide architectural and landscape harmony. The city’s many parks were targeted for transformation into more user-friendly family parks where the community could engage in a variety of leisure activities. This included the skateboard park development that also served to reduce crime and divert youth away from the nearby shopping centre. With ongoing support from the marketing agency, the City of Belmont commenced the development of a series of communications programs designed to reinforce the branding of the ‘City of Opportunity’. A newsletter, The Belmont Bulletin, was launched that was professional produced, had a glossy style but was also informative and interesting to residents. An ‘Opportunity Card’ was created in the form of a small plastic card, similar in size to a credit card, which carried the new city logo. This was issued to all residents in the municipality and could be used to obtain discounts and incentives such as free concerts, fish and chips, hot dogs and drinks at public events. An attempt was also made to get local businesses to offer cardholders a discount (Fig. 4.1). According to the senior management at Belmont, it became easier to achieve change and introduce new ideas once the ‘City of Opportunity’ process was in place. Instead of having to justify every single new initiative and argue it on its merits, the entire package could be viewed as part of the overall process of change. Council was willing to support new ideas if they fitted within the overall strategy for the revival of the city. Furthermore, the shift in thinking also impacted on the employees within City of

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Fig. 4.1  City of Belmont Opportunity Magazine & Opportunity Card used to help promote the strategy to the wider community. (Source: City of Belmont)

Belmont. Senior management encouraged junior staff to become engaged in the change process, become ambassadors for change. Through an honest and open sharing of ideas, junior staff were asked to contribute new ideas and suggest new initiatives. This served to stimulate innovation and encourage new ideas. Planning staff in particular became enthusiastic advocates of change, as they could see themselves able to contribute toward a better future for the entire community rather than simply enforce rules and regulations. Another example of this innovation was the introduction of a GIS product incorporating computer-based mapping software based on ARCVIEW and MAPOBJECTS. This system enabled a resident to look at a map of the city, locate a particular parcel of land or building lot, and have this linked to other databases providing cross references to ownership, rates payments and zoning. The system assisted front counter staff to answer public enquires regarding property ownership or regulation. It was a major support to the customer service charter initiated within the council.

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Facing the Future In 2000, the same university researchers who had conducted the 1995 study were commissioned by the City of Belmont to undertaken a new research study to review the progress made and to look to the future. The findings of this research confirmed the overall success of the ‘City of Opportunity’ campaign and demonstrated a significant turnaround in community attitudes toward the municipality. Whereas in 1995 the most common description used for the City of Belmont was ‘ordinary’, 5 years later this had shifted to ‘friendly’, ‘go-ahead’, ‘inexpensive’ and ‘beautiful’. Perhaps, more significantly, the proportion of respondents who considered Belmont ‘safe’ had increased from 20% to over 60%. Around half of all people surveyed could name the ‘City of Opportunity’ brand name unprompted, suggesting that the street signs and other media carrying the city’s logo were being noticed. The research also indicated that both residents and businesses recognised and appreciated the work of the council over the previous 5 years. Initiatives such as the Belmont Bulletin, the skateboard park, security patrols and opportunity card were all strongly endorsed. Further, residential land values had risen by around 6% over the period. There had been an influx of new residents and a significant increase in new businesses that recognised the central location of Belmont and its easy accessibility to the airport, the CBD and other parts of Perth. Despite these positive findings, senior management within the City of Belmont remained worried. They recognised that their endeavours over the past 5 years had raised the bar, and that the community was now watching and expecting them to ‘jump higher’. There was a fear that councillors, delighted with the progress made, might become complacent. Further, there remained many new challenges looming on the horizon. The river foreshore was coming under increasing pressure for residential and business development, and this was likely to lead to public disquiet regarding environmental impacts. The close proximity of Belmont to the Perth CBD was also expected to force the pace of change on the municipality. Land prices would rise and developers were already seeking opportunities to increase housing densities and alter the zoning. Finally, a major industrial development within the Perth airport zone was being initiated which was threatening to impose further pressures on the council to provide services. The Westralian Airports Corporation (WAC) had indicated that they sought to establish within the airport such significant ventures as multiple international call centres of between 400 and 600 seats, and a customs-free manufacturing zone. The upgrading of the Perth international airport would eventually lead to the facility accepting the new A380 ‘super jumbos’ capable of taking around 600 passengers at a time. Direct flights of such aircraft between London and Perth was expected to transform the volume of traffic arriving into Western Australia and therefore into the City of Belmont. As they contemplated the challenge ahead, the senior managers at Belmont wondered if they could repeat the successes of the past 5 years.

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Work Book: Innovation in Small Firms

5.1

Learning Objectives

After completing this chapter, you will be able to: • • • • • •

5.2

Consider the differences between entrepreneurs and owner-managers. Recognise the difference between an entrepreneur and an owner-manager. Examine the theory of small business management. Understand the causes of small business success and failure. Understand the entrepreneurial growth cycle of small firms. Understand the three primary strategic options available to the small firm and recognise the five key elements of an entrepreneurial growth firm.

Chapter Review

This chapter has provided an overview of the small business sector and the nature of small business management. Small firms are a major source of employment and economic growth throughout the world and provide a management environment that is very different from that found in large organisations. A problem in understanding the small business sector is the lack of agreed definitions as to what an SME is. Most SMEs lack the resources of large firms and are dependent on one or two key owner-managers for their long-term survival. Small firms are typically less formal that their large counterparts, and are run more for lifestyle than for growth by their owners. Entrepreneurs can own a small business, but not all small business owners are entrepreneurs. Most small business owners are oriented toward lifestyle and task management rather than risk taking, innovation and growth. Small businesses are often undercapitalised and their owners lack management skills. © Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_5

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There is relatively little theory relating to the small firm. However, attention needs to be given to understanding the interplay between the firm’s task environment, organisational configuration and managerial characteristics. As a management challenge, the small firm is unique due to the limited resources and lack of systems, and many small firms fail due to problems in these areas. Growth within a small business requires not only an entrepreneurial owner but also a strong level of innovation, good networking and a product-market growth strategy. The owner-manager will then need to match their resources, strategy and structure to what is required for success. Yet growth is only one strategic option available to the small firm. Other options include exit and stasis, both of which are more common and require active management. For the small firm that seeks growth, attention needs to be given to the entrepreneurial leadership of its senior management team, its ability to innovate and develop strategic networks, and the success with which it identifies a growth vector in developing suitable product/market strategies. The ongoing challenge for the small business owner is their ability to balance the three key elements of strategy, structure and resources.

5.3

Key Lessons

• The definition of what constitutes a small firm is a complex and difficult area for academic research. The most usual criteria for such definitions include the number of employees, annual turnover or assets under management. • In any given economy, the total number of Gazelles is estimated to be less than 1% of all firms by employment and 2% by annual turnover. The risk and uncertainty associated with the successful launch and growth of a Gazelle or Unicorn firm has led to a rethink of entrepreneurship and small business policy and more job growth seems to be generated by older high-growth firms than the younger Gazelles. • Small firms are typically defined by informality, loose job definitions and open communication flows; on the other, large corporations are usually more rigid and formal, with highly-structured communication systems. Small firms also lack the systems that allow strategic planning, human resource management and financial control to take place in the same way as it does in large firms. • Overall, SMEs are less likely to have formal business planning processes, quality assurance systems and human resource management practices than their larger counterparts. Gazelles are more likely to have formal systems and to embrace innovation. • Entrepreneur and owner-managers are two concepts occur at either end of a continuum, defined to a large extent by the owner’s orientation toward growth and profit maximisation at the expense of lifestyle and their ability to control the venture in a direct way. • To understand the operation of a small firm requires attention to be given to three primary areas: 1. Task Environment: perceived opportunity, uncertainty and risk;

5.4  Learning Activities

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2. Organisational Configuration: complexity is there in the production, complexity of the firm’s structure, the firm’s resources allocation and availability; 3. Managerial Characteristics: leadership style, entrepreneurial orientation, managerial competence and capacity for strategic partnering. • There are many possible causes of failure in a small business: Poor economic conditions but also the way the business is managed: Underestimation of the start-up time, Undercapitalisation, Overestimation of the market size, Lack of expertise by management, Lack of working capital, Confusion of cash flow over profit, Wrong location of the business, No unique selling point, Recruitment of the wrong people to staff it, Failure to monitor the business performance, Failure to retain profits in the business to fund growth. • Growth cycle of a small business although not as linear as suggested, remain a useful framework for understanding the process of growth within SMEs. 1. Start-up stage: the business is conceived and established. Attention is given to finding customers and maintaining adequate cash flows to survive. 2. Survival stage: the business is financially viable and may even hire additional staff 3. Third stage, sub-sage ‘success-disengagement’: the owner-manager makes a decision to either grow or not. If it grows: the business will enter the ‘success-­ growth’ sub-stage where the owner-manager places the business under risk to finance growth 4. Take-off stage: involves a process of team building and delegation. In this critical stage, the businesses will either succeed and develop into a large business, or not. 5. Maturity stage: the business has sufficient resources to conduct formal strategic planning. • The owner-manager essentially has three primary strategic options: (1) growth, (2) exit, and (3) stasis 1. The growth option needs visionary leadership, entrepreneurial orientation and strategic thinking 2. The exit option can take at least two forms: abandonment and closure of the firm, or transfer of ownership to a new ownership team. 3. Stasis option means for the owner-manager to secure a comfortable and secure lifestyle.

5.4

Learning Activities

1. Consider the differences between the owner-manager who is focused on lifestyle and the entrepreneur who is focused on business growth and profit maximisation. Why are the majority of small businesses run by ‘lifestylers’ rather than entrepreneurs?

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2. Interview a small business owner-manager who you know and explore the factors that led them to start their venture and the major things that they consider to be positive and negative about being a small business owner. 3. If you were considering becoming a small business owner what would you need to consider in ensuring that you reduced your chances of failure and maximised your chances for success? Answer this with reference to the material covered in this chapter

5.5

Case Study Analysis

Read the Stillroom case study below, which examines the story of two people who have a personal relationship that leads them to launch a new business venture. The opportunity this venture pursued and its potential for high growth was significant. However, the two partners had very different strategic goals, and the challenges of trying to manage a high-grow, small firm with global market ambitions, placed significant pressures on their relationship and family life. The case offers many important lessons for anyone seeking to pursue entrepreneurial goals via a small, high-growth business venture. When you have read the case and considered its lessons against the issues discussed in this chapter, address the following questions:

Questions/Tasks 1 . What were the motivations the two owners had for setting up their business? 2. What major problems did they face? 3. Why did the business experience difficulties? 4. What does this case tell us about the nature of small businesses seeking to pursue high-growth?

5.6

Case Study: The Stillroom; When Love Is Not Enough

Authors: John Walker and Olive Schmidenberg (Edited by Diana de Bussy) When two lovers decided to mix business with pleasure, were they asking for trouble? Together they turned a hobby into a small business, but when faced with constant cash flow problems which arose from very high growth and undercapitalisation, the dream became a nightmare. Soon, niggling differences of opinion grew into major issues of contention, and the lovers no longer shared a common goal or vision. Pillow talk turned to petulance and the bedroom became a battle field. When did the warning lights start to flash? The Stillroom story is based on information supplied by John Walker and reflects his interpretation of events over a 5-year period from the launch of the business until the end when the partnership broke down.

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Love Grows John Walker, a qualified accountant with substantial experience in small business, began to work on a casual basis in his partner’s cottage industry business making perfumed wax clothing protectors in the kitchen of her suburban home in Perth. Their relationship had blossomed whilst Helen was working part-time for John in his personal development business, which closed 3  months earlier leaving him unemployed. Both parties had been married before. John was still vulnerable from the breakdown of his own marriage and business failure, and he found the simple manual – yet creative – tasks required while working for Helen to be therapeutic. Formerly a school teacher, Helen had pursued an alternative lifestyle and developed an interest in handicrafts. To supplement her income – which relied on social security, relief teaching and occasional workshops – she made wax blocks scented with essential oils extracted from eucalyptus and tea tree. The blocks were covered in attractive material, decorated with straw bows or dried flowers, and sold as clothing protectors. She traded as The Stillroom and sold her product at retail craft fairs together with some food products. A friend worked part-time with Helen, but The Stillroom was a hobby operated more for fun than for financial return. In the first financial year, sales for the year totalled less than AUD $5000.

From Little Acorns Helen had recently received a small order from the Wilderness Society Christmas mail order catalogue, which prompted her to expand her hobby into a small cottage industry. John began to help with production whilst he was receiving social security and searching for other work opportunities. He was enthusiastic about a new range of product samples prepared by Helen’s part-time partner, but based on current levels of production and sales he realised it would be a long time before The Stillroom would generate the size of income  – around AUD $100,000  – that he had been accustomed to in previous business and farming ventures. John decided to devote his time to developing Helen’s cottage industry into a profitable small business and in August suggested a trip to the south west of Western Australia (WA) to test the market. Initially Helen found it difficult to focus on their daily sales target of 200 units, preferring to explore personal development career options. However, the visit was a success and John was confident that they could make a living from The Stillroom with consistent marketing.

A Small Business Blossoms This sales trip marked the beginning of a more serious approach to Helen’s cottage industry. The new products were proving to be popular, and a further range of calico and flower decorated clothing protectors had been developed at the suggestion of a

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customer who owned an environment shop and who was later to become a marketing consultant to The Stillroom. By this stage John already felt he was the motivating ‘driver’ behind The Stillroom’s production, development and marketing. Helen had little previous business experience. She was committed to her family responsibilities and was still dabbling in personal development programs. He used his own computer equipment and software to produce financial forecasts and product cost estimates, and rationalised that the business was viable if they could establish 500 regular customers – which meant looking outside WA for sales. Personal financial pressures forced John to consider his options whether to find employment or to make The Stillroom a full-time commitment. In addition, his mother was contributing to the business by providing a free sewing service, but there were no formal arrangements concerning equity. With the impending transformation from a cottage industry to a small business, Helen’s part-time partner decided to leave and Helen agreed to a 50/50 split with John. A new bank account was opened with John as a signatory, but no decision had been made about the corporate structure or finance, so the business was still technically in Helen’s name. John felt confident about his relationship and was prepared to trust Helen to look after his long-term interests. But issues of individual contributions, expertise, ownership of intellectual property, hours of work, future growth and any settlement rights Helen’s former husband may have had had still not been resolved. By the end of their 1st year of operations, The Stillroom was making sufficient sales to pay for their living costs, and John stopped looking for other work. Realising that the business required working capital to finance stock, debtors and marketing costs, John hoped that Helen would utilise her marriage settlement money. However, Helen, wished to make a deposit of AUD $50,000 on a house. Without capital injection, The Stillroom would require a large proportion of high margin cash sales (COD1 or retail) to provide cash flow in order to remain viable and finance early growth. Success at the Victoria Rose Fair in October proved this was possible, with over AUD $7000 in high margin sales in 3 days of trading.

Corporate Structure Helen had received some advice from her brother and his accountant concerning the corporate structure of The Stillroom, but John believed some issues – such as sales and income tax liabilities, partners’ drawings and working capital – had been overlooked. He offered to frame a unit trust and family trust structure which would eliminate the income tax component for the initial period and marginally protect Helen from any potential claim from her husband. Her husband agreed to transfer his right as a registered joint owner of The Stillroom to the new unit trust corporate structure. Her brother was made a joint trustee of the new family trust and a unit  Cash on Delivery (COD).

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holder in the unit trust so that she could earn management fees without being liable for PAYE deductions by trading as a ‘personal exertion trust’. Later, Helen’s brother resigned when guarantees were required for an overdraft facility, but Helen failed to correct the ‘personal exertion’ issue.

Financial Management In February of the 2nd year, The Stillroom exhibited at the Sydney Gift Fair. This event coincided with the financial settlement and relocation to Helen’s new house. They returned from Sydney with orders for about 7000 items worth AUD $40,000 in sales, and started to panic because they had no safety stock and also needed funds to meet the house settlement costs. John believed a more appropriate accounting system was required before any pro-forma invoices could be sent and became frustrated with Helen’s apparent lack of concern with the urgent need to send the invoices. In the rush, a new software program was chosen which later proved to be unsuitable. They employed a part-time manager to handle the administration and accounting on terms which would favour The Stillroom’s cash flow. There was not enough cash to meet management costs as funds from profits were required to pay creditors for the build-up of safety stock. John knew the situation was destined to worsen as re-­ orders on credit were imminent and they were not making enough retail sales to generate sufficient working capital. The new manager was offered 10% equity and free use of John’s computer equipment, provided he took deferred terms for his services. This ‘equity for services handshake agreement’ with the new manager was not documented formally at this stage, but taken on trust between all parties. Helen agreed that administration was not her forte, and that both she and John would allocate more time to marketing. (As some local media coverage in the press and on television the previous year had led to greater public awareness and increased sales, this had highlighted for them the value of media publicity). The arrangement suited John as he no longer wished to undertake the bookkeeping role himself. He also believed some negative business elements and differences in priorities were beginning to affect his personal relationship with Helen, and preferred the manager to act as the direct interface.

The First Agency The Stillroom’s customer follow-up after the Sydney Fair was poor – especially in WA – and re-orders began to drop off. The stock in shops was left unattended and retailers were disappointed with sales. John recommended an agency structure, but Helen resisted this suggestion on the grounds that she had a special relationship with many of the WA retail clients. However, new agents were appointed, customer service improved and the volume of sales increased, exceeding AUD $6000 in WA

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in the 1st month and continuing to grow every month thereafter. But the agency structure was successful only in WA, despite a high turnover of agents. A similar exercise in the other states failed.

Success: Gift Fairs and Exports By April of that year, The Stillroom was invited to join a group of WA crafts people to exhibit at the Singapore Gift Fair. John’s mother advanced AUD $5000 on a short-term loan for the Singapore exercise, as The Stillroom was still short of cash flow despite a recent AUD $10,000 overdraft facility on a second mortgage of Helen’s house. The Stillroom was the most successful WA exhibitor at the Gift Fair and all the display stock was sold for cash. Within 6 months they had orders from Indonesia, Malaysia and Singapore worth around AUD $100,000. One order produced a profit of AUD $15,000 within 2 months, and took less than 1 week to manufacture and dispatch. This same customer then entered negotiations to start a joint venture in Asia. The success of the Singapore Gift Fair proved the value of high export sales in generating working capital and cash flow. Export sales are pre-paid before shipment and incur no sales tax consequences. A trial shipment to Japan from the Sydney Gift Fair in February was also providing profitable sales leads. Other export and trade fair opportunities were investigated. Their goal was to increase low risk exports to 70–80% of total sales. After Government subsidies were taken into account, their results were better than domestic sales. Substantial export sales at retail and wholesale fairs in Australia in the 6 months to December of that year produced profits in excess of AUD $60,000 after drawings, fees and expenses. An additional 100 customers were added to the database, and the business was on target to achieve 500 customers by the end of the year.

New Commercial Premises and Production Methods During the 1st year of trading, John had experimented with the production process and devised a method of manufacturing 500 wax blocks in 4 h using a large gas burner purchased for AUD $135. Production capacity was not a problem and he estimated sales would have to exceed AUD $240,000 per month before further mechanisation would be required. However, in June of their 2nd year of operations they were advised by the local council that they had to move the business away from Helen’s home. They decided to trial commercial premises with potential retail space, intending to pay the rent with retail profits, but other commitments, such as pre-Christmas trade fairs, large export orders and the joint venture negotiations prevented the retail operation from becoming a reality.

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With the move to commercial premises, Helen divided her time between The Stillroom and her family responsibilities, whilst John continued to contribute substantial hours to production, dispatch, sales, marketing and exports. Since Christmas of the previous year, sewing and packing had been sub-­ contracted to an organisation for the disabled, but due to problems with quality control and delivery this arrangement ceased in July of the following year. An advertisement for home-based sub-contractors produced a large response, but supervision of the out-workers was time consuming and quality control was still a problem due to the number of people involved. A sub-contractor employed earlier in the year to help with production and dispatch now became a PAYE employee2, and her husband was sub-contracted to make the wax blocks and wooden display crates. Production management improved when another couple with industrial sewing machines and substantial small business experience were employed to supervise coloured fabric products, and John’s mother became responsible for the calico and dried flower products on a contract basis. Both parties were offered higher rates, and John’s mother received an over-ride of 33.3% of the invoices submitted by the sub-­ contractors. On occasions, when cash flow was tight, she worked for nothing in dispatch to save the business wage costs.

Mother’s Private Investment The changeover to the new supervising system happened at the same time that John’s mother invested AUD $40,000 (September of year 2) as an interest-free loan with a debenture charge, in exchange for 20% equity. Her physical involvement in the business made her feel more comfortable about the investment, and John justified the loan structure on the grounds that: … the goodwill and value of the business were tenuous therefore, based on valuation, an investment for 20% equity alone was too risky.

From John’s former experience as a finance broker and venture capital consultant, he believed independent arms-length investors would require more than 20% equity. Helen’s brother was offered the same opportunity but he declined to accept. However, both John and Helen maintained 40% equity each totalling more than 75%, the level required for special resolutions under the unit trust deed. There was no need to make interest payments from an already tight financial situation. In addition, a trademark application to protect intellectual property rights was not yet in The Stillroom’s name. A personal disagreement with Helen and withdrawal of the unwritten “licence” to use the trademark could have jeopardised all shareholders rights. Product effectiveness had not been tested independently, and registration or re-labelling could have had an adverse effect on the business.  PAYE = pay as you earn, or salaried employee registered with the taxation office by the company. 2

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These issues were addressed subsequently, but at the time John considered them important from an investor’s perspective and he believed The Stillroom name had an independent value, separate from the products. The loan transaction was carried out in haste because The Stillroom was short of desperately needed cash flow to maintain stock levels, despite 90 days credit from some suppliers. In addition, John was due to fly to Canada to exhibit at the Vancouver Gift Fair. At this stage, confident he could maintain overseas sales leads, John was responsible for all export negotiations whilst Helen concentrated on the domestic market. Although it was agreed that the loan would be secured with a debenture charge, this facility was never put into place.

Factoring to Finance Debtors Having experienced the business for more than a year, John assessed that their debtors and stock inventory required independent financing. They agreed to a factoring facility to finance debtors, subject to a cash security deposit of AUD $10,000 and a third mortgage on Helen’s house. He estimated a safe stock level of AUD $40,000, or the equivalent of 1 month’s sales. By financing their debtors with factoring and the inventory from the family investment, their overheads, drawings and pre-paid marketing expenses could be paid for from profits. Any pro-forma high margin export sales would then provide a bonus cash injection. At the same time, a lawyer was instructed to draw up the documents to record the manager’s 10% equity agreement and change the trustee of the unit trust to a company. This would promote a more appropriate business image to international markets and enable registration of John’s mother’s debenture charge against the inventory. He believed her AUD $40,000 investment should take priority over normal trade creditors if the business was put into financial jeopardy. The documentation was to be completed immediately before John travelled to Vancouver. All parties signed except one, and it was left to the manager to complete the paperwork and follow up the legal documentation.

The Age of Discontent On his return from Canada, John was busy travelling to a number of profitable craft fairs in the eastern states of Australia, and he failed to confirm the status of the legal documents with the manager. When eventually he did, he discovered a number of errors. Personality clashes were disrupting the culture of what had begun as a friendly cottage industry, and disagreements erupted between John and Helen over items of personal expenditure from the business finances, which were being funded by loans. And, John’s vision to establish a million-dollar turnover or net worth business in 3 years was not shared by all. The retail exercise at the commercial premises had not eventuated, and productivity was lower than when John and Helen worked from home, so they decided to

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buy a larger house in an area with appropriate zoning on the grounds that, even with 100% financing, they would be no worse off than with the combined costs of a factory and a residential mortgage. John believed that, with both of them working from a business-owned home, they would become more productive and his family’s financial security would be improved.

History Repeats Itself In mid-January of the 3rd year of operations, a decision to exhibit at the San Francisco Gift Fair once again interfered with John’s resolve to tidy up the legal documentation. They were already committed to three other domestic and two international trade fairs, but believed that the risk was minimal as they were confident that export trade fairs provided positive cash flow within a couple of months. Whilst stock and display units were being manufactured and freight organised, they had to move out of the commercial premises into temporary premises as an interim until the new house was ready. A pattern of pre-trade fair rush was forming.

Taxation Whilst John and Helen were in San Francisco, the manager worked with an accountant to prepare interim accounts to the end of December of the previous year, as these were required by the bank for the housing loan application, Also, the previous financial year’s accounts for Helen and the unit trust were prepared. Since for the first 7 months of the financial year the business was in Helen’s name, and then from February, the assets and liabilities were taken over by the unit trust. As part of their verbal equity agreement, John had agreed to take all the income in the Unit Trust under a management consultancy capacity, which meant that Helen was not liable for personal tax for that financial year as John still had access to tax losses from a previous farming business.

Accounting Alternatives When John and Helen returned from San Francisco, the situation with the manager deteriorated and his services were terminated. John investigated two accounting alternatives, to buy new hardware and software or to engage a franchise bookkeeping service. He chose the second option to avoid installing a new system himself and having to learn the software program, and also to maintain his focus on his marketing role. The franchise bookkeeping service, however, could not assist with the factoring facility. Without a manager, John was required to supervise the changeover to the bookkeeping franchise and to learn the complicated factoring reconciliation system, which meant he could no longer focus on marketing with Helen. Complications

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arose because the factoring company operated a manual system, presented non-­ standard reconciliation, and did not send statements. In John’s opinion, all these factors, combined with persistent mistakes and inconsistent recordkeeping, highlighted the need for a good internal accounting system. The bookkeeping service was terminated in July of that year.

Partners’ Drawings Prior to the change to the bookkeeping franchise, John and Helen had withdrawn funds as required. With the new bookkeeping system, management fees of AUD $3000 per month were journalised to both family trusts. Cash drawings, rent and private expenditure were also then debited to this loan account. It was assumed that unpaid profit distributions would credit the same loan accounts. But with different work and family commitments and priorities, the topic of drawings became a contentious issue.

Finance for the New House In March of the 3rd year of operations, the new house was purchased in the name of the business. When Helen’s house failed to sell, John’s mother provided bridging funds of AUD $30,000 as a cash security deposit to finance an overdraft from the bank, which was repaid over the following 9 months.

Business Improvement Program From February of the 3rd year, apart from one oversees trip to the Hong Kong Gift Fair, John stayed at home to manage the business while Helen travelled to trade fairs. Frustrated with the continuing accounting problems and feeling under pressure from a heavy work load after the manager’s departure, John suggested that they should start some business improvement activities under a New Enterprise Incentive Scheme (NIES) program funded by the Australian federal government. He believed Helen and some other members of The Stillroom team lacked business skills and a proper understanding of finance, and failed to focus on sales and marketing. He also felt that his mother’s investment was at risk and he wanted to share the work load and responsibility for the family investment. To be eligible for NEIS assistance, a Business Assessment was required. This was carried out by a total quality management (TQM) specialist who exposed John and Helen’s divergent focus. John hoped an independent skills audit would provide evidence of technical and financial deficiencies, but the audit could not be carried out in the timeframe available. John made enquiries about the Enterprise Workshop Program (EWP) at the local Edith Cowan University. A graduate of this program, he thought it was an excellent

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tool for people planning to enter small business. Three members of The Stillroom team, including Helen, agreed to participate, but within 3 months they all withdrew due to disagreements with other students in their team. However, a draft business plan prepared during the program was used as part of an application for a Best Practice Award. With encouragement from a business consultant, John prepared the application for a Best Practice Grant. In July of the 3rd year since the launch of the business, they were informed that The Stillroom was 1 of 30 Best Practice winners and would receive a grant of AUD $113,000. The grant coincided with the design of a new corporate logo and Design Mark award. John had applied for a Design Mark for the clothing protector, as he believed that The Stillroom required an independent and public status. The Design Mark was granted on condition that the business develops a more up-market corporate image. The Best Practice news was received with delight, and John began to devise ways to capitalise on the publicity and sales opportunities prior to the Melbourne and Sydney gift fairs. A public relations company agreed to accept the account on favourable credit terms, but there was not enough time for the publicity to have an effect at those trade fairs.

Change from Fixed to Variable Costs With everyone’s attention directed towards the EWP, Best Practice Award and Design Mark application, normal business and sales suffered, and The Stillroom incurred losses of around AUD $50,000. The shortfall in profits was met by an overdraught of AUD $40,000, but cash flow continued to be a problem. John proposed some changes to reduce overheads and lower the break-even volume of sales. He attributed the losses over this period to the lack of a focused marketing effort and to poor recording systems. He suggested one production staff member go off PAYE and join her husband on a service contract for a remuneration of 10 percentage of sales. Another, who had started work as a marketing consultant and had joined the EWP, agreed to operate as an independent distributor, attending retail craft fairs. The Stillroom would supply product at export prices and she would take the retail margin in exchange. All air fares and accommodation costs were to be met from the distributor’s margin. The result was more team members focused on sales and a cost structure based on variable rather than fixed costs.

Accounting Problems At the end of July, John began to try to solve the financial problems and to learn the new accounting software, but the volume of past mistakes was greater than he anticipated. Apart from recording debtors and creditors, the first priority was to sort out the factoring account, which meant designing a system that was error proof and easy

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to reconcile. Errors were hard to detect because the factoring facility had not sent normal statements, and so the other accounting functions were always in arrears. It had proved a costly and inefficient exercise, at about 40% per annum effective interest on the outstanding net balance, excluding a time cost for management. It was not until a new stock control system was installed in October of the following year, and the financial accounts for first two full financial years of operations were completed, that the business could be managed on a daily basis with minimal accounting expertise.

Export Manager Exports sales had been dropping off since John was no longer directly involved in marketing, due to his CEO/bookkeeper responsibilities. In addition, his relationship with Helen was starting to show the effects of their continued separation due to different work commitments. John contacted ‘Don’t Overlook Mature Experience’ (DOME) and appointed an export manager on trial for an advance of AUD $500 per week to be netted off against future commissions. The export manager was sent to Jakarta with stock to relieve Helen who wished to return home. From September to December, the new export manager travelled overseas many times, but the appointment was not cost-effective and his contract was terminated in January of the 4th year of operations.

Investor Sought By the end of the 3rd year of trading, The Stillroom advertised for investors and received an investment offer of AUD $100,000, which would eliminate the factoring facility and bank overdraft and allow John to concentrate on marketing and the Best Practice Program, although on settlement the actual amount was reduced to AUD $50,000. John was under pressure to prepare final accounts in a short timeframe, and his relationship with Helen deteriorated further. To make the business more efficient, they needed more administrative assistance which required more sales or capital. But capital injection was dependent on the past financial year’s accounts being available – a classic ‘catch 22’. Later, John decided to shelve the Best Practice activities until the accounting and financial problems were resolved. As a consequence, when The Stillroom could not meet its deadlines, the program grant was halved.

Business Valuation and Possible Sale They continued to investigate other equity options. John was not convinced the AUD $100,000 loan offer was enough to meet long-term needs and he preferred equity arrangements  – especially if the investor could provide expertise and

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services. They entered discussions with a Fremantle group, which expressed an interest in buying them out for AUD $200,000 plus equity, with continued management involvement from John, Helen and the rest of team, but negotiations broke down due to lack of clarity around the proposed equity structure. The business was valued by brokers with a view to raising equity or achieving an outright sale. The value suggested was AUD $425,000 plus stock. Helen and John were prepared to sell for this amount, as they were becoming tired and were becoming attracted to other lifestyle options. The business was listed and John raised the price to AUD $300,000 for 40% equity.

Direct Marketing and Franchising By December of the third trading year, Helen and two other team members had been trialling a direct sales approach via workshops. They were aiming for a greater percentage of high margin retail sales to keep everyone in employment and to demonstrate The Stillroom’s income possibilities to potential franchisees, but the concept had limited success and was not profitable. From April to June of the fourth trading year they explored licence or franchise options to develop the workshop concept and add to the business value. Existing agents were offered the first option for the state licence for AUD $70,000. This was reduced to AUD $40,000 but the agents declined. Later, a verbal agreement proposed that the first state licence or franchise would be sold to John’s mother in exchange for her debt and sold on after the documentation was completed. The state agent would manage the licence to gain experience in the total business. Every part of the marketing operation would be documented in a manual and taught to the agent, who would service and supervise the franchises. The system would provide a record of sales and profits for reporting purposes, tidy up the balance sheet by reducing debt, and provide security for John’s mother’s investment. Before the documentation was completed, Helen changed her mind about the franchise option. Personality conflicts between staff were brewing and the beginning of a total breakdown of the business was in sight.

Business Management Pressures From June to August of their 4th year in business, a number of major activities were scheduled. Despite the internal problems, The Stillroom had been selected as the feature company at the Prime Minister’s launch of AusIndustry. A change of structure from trust to company, The Stillroom Australia Pty Ltd., was required in order to register a debenture charge from a finance company. Discussions to sell the business were underway. A Japanese distributor was visiting Perth for negotiations and training. Other activities included the end-of-year financial statements and stock take, staff training and trade fairs. During this period, John felt that Helen and one

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of the sales team were working in opposition to him, as new products were being introduced without his knowledge and without any financial planning. A total quality management (TQM) program was underway as part of the Best Practice Award, but despite a general consensus about their direction at meetings, in reality there were disagreements, emotional outbursts and a lack of communication. John wanted to focus on exports and on improving the administrative, accounting and stock inventory systems. Without equity capital or the sale of a franchise, he believed they required AUD $80,000 per month in sales to support their cost structure and meet debts. A short-term loan of AUD $4100 from John’s mother was used to pay sub-contractor costs, and in September of that year she advanced a further AUD $20,000 to meet sales tax arrears until John could arrange alternative finance. As a direct contradiction to an agreement they had made at a TQM meeting, John claimed Helen introduced new products and packaging immediately prior to a trade fair in September without his knowledge and with no consideration for safety stock or cash flow. They had agreed they would concentrate on sales and customer service with the existing product range. Their product range had now increased to 84 items, most of which were self-competing and contributed less than 1% of total sales for each line. Furthermore, 50% of sales and profits came from just three items. Helen announced that she wished to quit the business, but was advised to go on holiday by the TQM counsellor. John’s workload increased further and the tension mounted.

Repayment of Loans Documents had been drawn up to register a debenture charge as security for John’s mother’s investments. Her exposure was up to AUD $80,000 because she had not cashed signed cheques John had left her. However, on her return from holiday, Helen refused to sign the documents, which honoured a previous agreement to provide security. John felt strongly about Helen’s actions and told his mother to present the cheques she already held for AUD $4100 and AUD $20,000 when the funds were available for cashing. He did not advise Helen of his actions because she was receiving conflicting advice which he believed was against his mother’s interests.

Accusations and Mediation Following the repayment of John’s mother’s funds, Helen accused John of dishonesty and appointed an auditor. Their personal relationship broke down completely and they parted. Mediation was proposed but Helen declined, preferring to remain dependent on friends and colleagues for support. John continued to attend business meetings and sought professional advice. An offer was made to pay John’s mother AUD $60,000 with interest on her funds for 3  years, plus car and telephone expenses. The offer was withdrawn then re-­ submitted. Helen gave John 2  h to accept or else the business would be put into

Reference

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liquidation. John was not prepared to accept voluntary liquidation until he had received an independent valuation. Together with an advisor, he did a quick calculation based on the last year’s financial results and determined that the value as a going concern was probably substantially greater than Helen’s offer. John and his mother decided to obtain some indicative values before making a final decision. He believed Helen was trying to devalue the business, as she had mentioned in discussions that she had been advised to liquidate and start again. John could not understand this advice which appeared to ignore normal company law and the unit trust documentation.

The Final Cut Offers to buy and sell see-sawed, and the relationship came to a bitter end. Eventually, 5 years after launching the business together, John purchased the business from Helen and turned The Stillroom into a: ... very profitable $600,000 a year venture with growing export orders from South East Asia and Japan. (Kennedy 1996)

Reference Kennedy, A (1996, October 28). Love is not enough at boardroom table. BRW, p. 76.

6

Work Book: Adoption and Diffusion of Innovation

6.1

Learning Objectives

After completing this chapter, you should be able to: • • • • •

6.2

Understand the process of innovation diffusion. Review theories of adoption and diffusion. Recognise the social nature of innovation diffusion. Understand the innovation decision-making process within organisations. Understand some of the reasons for failure of innovation adoption and diffusion.

Chapter Review

This chapter examines the process of adoption and diffusion of innovation. It suggests that innovation is driven by three paradigms, focusing respectively on: the individual creative genius, the technology-push of systematic scientific inquiry, and market-pull. While the creation of innovative new ideas and technologies is an important goal for business, there is no value in innovation without commercialisation which is frequently fraught with challenges. The diffusion of innovation is a social process that involves inventors being imitated by adopters. Their decision to adopt – or not to adopt – is influenced by a combination of rational attitudes and subjective norms that can be shaped by peer group influence. Word of mouth can play a key role in the diffusion process as early adopters provide recommendations and role models for laggards. Successful commercialisation requires the innovation to be adopted by customers and to diffuse into markets. Customers will not always accept new ideas. They usually need to be assured that the innovation: can be integrated with their existing systems, is able to produce genuine benefits, is easy to use, © Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_6

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and is also being accepted by others. It can take many years for a new innovation to gain acceptance in markets. Good technology development must also be accompanied by good market and business development.

6.3

Key Lessons

• Innovation is a specific function of entrepreneurship and is the means by which the entrepreneur creates new wealth-producing resources or endows existing resources with enhanced potential for creating wealth. It is the process by which entrepreneurs convert ideas into marketable opportunities. • The commercialisation of an innovation requires the new product or process to be successfully taken from the idea stage to full market acceptance. It has been likened to a process of bridging a gap • The adoption of new technology is frequently unable to move past the initial imitators or early adopters who readily take up the innovation but fail to influence the mainstream end-user group or wider community. There is a chasm into which the innovation may fall. Many excellent ideas or products fail to take off despite superior apparent advantages. • There are several major myths relating to innovation: that innovation is planned and predictable; technical specifications should be thoroughly prepared, creativity relies on dreams and blue-sky ideas, big projects develop better innovations than smaller ones, and technology is the main driving force for innovation and success. • Two main models are used to study innovation diffusion: 1. Rogers model, where the diffusion of innovation is contingent on five perceived attributes: relative advantage, complexity, compatibility, trial-ability and observability. 2. The TAM model, considering that the level at which a new technological innovation is adopted and therefore diffused into the target market is contingent upon the attitudes the adopters hold toward the innovation, affected by two mediating variables (the depth of experience the adopters have had with technology or innovation acquisitions of this type on the one hand, and the degree to which the adopter has discretion over whether or not they adopt, i.e. voluntariness on the other). • Earlier adopters affect later adopters in the adoption decision, and later adopters affect earlier adopters in the dis-adoption of an innovation. Critical mass typically involves opinion leaders in a social system and operates at the aggregate or social system level. • There are several categories of adopter depending on the timing of their take-up of the innovation. These are classified in five distinct groups described below: 1. Venturesome innovators, demonstrating a keen interest in new ideas, 2. Respectable early adopters, with local social networks and the greatest degree of opinion leadership of any category,

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3. The deliberate early majority, who adopts innovations just before the average member of the social system, 4. The sceptical late majority, adopting innovations just after the average member of the social system, and finally 5. The laggards having the most localised outlook and border on isolation • The individual adoption process usually comprises five stages of behaviour. 1. Knowledge, where the innovation is brought to the attention of the adopter who begins to learn of its merits and characteristics. 2. Persuasion, with the adopter forming an attitude toward the innovation that may be either favourable or unfavourable. 3. Decision, when the adopter either accepts or rejects the innovation. 4. Implementation occurs when the adopter puts the innovation to use. I 5. Confirmation see the adopter seeking reinforcement about the decision to accept or reject the innovation • Similarly, in organisational contexts adoption follow a six-stage process: 1. Agenda setting: the organisation begins to identify the need for an innovation through the definition of problems 2. Matching: the organisation seeks to match the innovation with the perceived problem or desired solution 3. Decision: the organisation selects the solution to its priority problem and decides to adopt or not adopt a particular innovation 4. Re-defining/restructuring: The adoption of an innovation is followed by a period of reinvention of the innovation to match the organisation’s needs. 5. Clarifying: the innovation is put to widespread use, with the innovation becoming clearer to the members of the organisation. 6. Routinizing: When the innovation is incorporated into the organisation and becomes routine • Word-of-mouth communication between individuals can play a key role in the diffusion process.

6.4

Learning Activities

1. Within your own work experience, identify a situation in which a new technology or process innovation was introduced to your organisation. Can you relate the adoption process that took place to the technology or innovation adoption models described in this chapter? 2. Consider the introduction of new mobile telephone technology into the market in your home country. What are the key social, economic, technical and cultural factors likely to determine the speed and success of its diffusion?

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Creativity Journal Entry

For your third journal entry, address the following: • Describe an innovation that has had a profound influence on your life, on your work, or on the way you live. What type of innovation was it and how has it changed your life? • How did you become aware of the innovation? • What type of adopter were you, e.g. innovator, early adopter, etc.? • Describe the innovation decision process that you went through up until the innovation became a ‘routine’ part of your life. • Identify key actors within your innovation decision network and how their influence affected your behaviour.

6.6

Group Exercise: GENCO and RENKA

This is a group problem solving challenge that provides you with an opportunity to review the content from Chaps. 4, 5, and this chapter, and apply their content to addressing a complex problem. Read the following problem and then in a group of other students, solve the problem. Further details of the task are found below.

The Problem Outlined GENCO is a small biotechnology company established 10 years ago with the purpose of identifying, cultivating and extracting marketable products from indigenous Australian flora and fauna. The initial research that led to the founding of GENCO was undertaken by a local university which identified the process for extracting the oils and compounds from the plant stock. This technology was licensed to GENCO for commercialization and the company had now widened its stock of plant species for oil extraction. The plant stock is provided by sub-contractors to GENCO who grow and harvest the plants, and GENCO in-turn sub-contracts to other firms wanting to derive compounds of interest from native plants. These compounds can attract prices of around $10,000 per kilogram. A key technology under development by GENCO is a natural, non-toxic insecticide extracted from Australian eucalypts. GENCO has secured patent protection for the innovation and considers that the compound has significant commercial potential for both domestic and industrial applications. The entrepreneurial founder of GENCO, Mr. K does not have a scientific background, but came from a marketing and advertising career. His motivation for establishing GENCO was triggered by his experience of working in a business that had developed new methods for the handling and transporting of live plant material

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around Australia. This led him to see the potential for commercialization of Australian native plants. Two years previously GENCO had secured a major contract with a large Australian pharmaceuticals manufacturer and had anticipated major growth. Unfortunately, this lead customer had collapsed due to poor management nearly taking GENCO down with it. Forced to severely downsize to a core team of six full time employees and restructure, GENCO is now financially stable but additional financial resources are urgently needed. A new lead customer RENKA, a large insecticide manufacturer, has now been found for the innovative insecticide product produced by GENCO.  However, RENKA is a demanding and somewhat conservative customer that needs to be convinced that the prototype product is safe and can be manufactured reliably and in commercial quantities. Of concern to the management team at RENKA is the ability of GENCO to supply sufficient quantities of the plant oil and undertake further R&D on the compound. Mr. K is excited about the potential for the RENKA production orders, but sees additional opportunities in a range of new products. As he explains, “our lead customers change with different innovations, as mentioned these products can be for perfumes, flavours, natural remedies, pharmaceuticals and pesticides”. He is negotiating with the same local university who developed the original extraction technology to undertake further R&D.

Your Task Explained Working in groups, undertake a critical analysis of this problem. You should apply the Rich Pictures and SIMPLEX process for creative problem solving as outlined in Chap. 3. The group should follow these steps: 1. Each individual group member draws a picture of the present and future desired states. 2. Annotate drawings with five priority functions/features to shift from present situation to desired future state and rank in order of importance. 3. Within the group conduct a ‘round robin’ with each member putting priority functions/features to the group without evaluation or criticism. 4. Rank functions/features in order of importance. 5. Develop a problem statement that summarises the underlying causes of the problem. 6. Draw on material from the text, in particular Chaps. 4, 5, and this chapter, and other readings to help you build an evidence-based argument and follow the SIMPLEX process in applied creativity. 7. Prepare a final solution (approximately four pages) and present to the class.

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Case Study Analysis

Read the Owen Gun case study, which provides a history of the commercialisation of the Australian designed and built Owen submachine gun invented by Evelyn Owen during World War II. The case highlights the many challenges experience by the inventor in getting a new and innovative product design through the difficult processes of development, proof of concept testing and eventual adoption. Once you have read the case, and examined its lessons against the material outlined in this chapter, address the following questions.

Questions/Tasks 1. What does this case reveal about the challenges facing the adoption and diffusion of a new, radical invention and the pathway that such diffusion can take? 2. With reference to the case, explain the theories of innovation diffusion making sure that you cover as many of the issues outlined in this chapter as possible in your analysis.

6.8

Case Study: The Owen Gun

By: Tim Mazzarol, based on source material from Mellor (1958) and Haycock and Ross (1987).

Australian soldiers with Owen submachine guns in New Guinea. (Source: Australian War Memorial)

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The ‘Owen Machine Carbine’ or ‘Owen Gun’ is an Australian designed and manufactured submachine gun invented by Evelyn Owen and used as the main submachine gun by Australian troops during the World War II and later during the Korean War. It fires a 9 mm ‘Parabellum’ pistol round at a rate of 700 rounds per minute, with an effective range of 123 m. It is simple and has the unique feature of a 32 round detachable box magazine that is top mounted. The gun uses a ‘blow back’ recoil system which is much less prone to jamming.

The Australian Patent System Australia became a member of the International Convention for the Protection of Industrial Property in 1907, and began issuing patents for local inventions. With an economy largely focused on primary industries and mining, the number of patents lodged prior to the World War I was modest. However, the war brought about a boost in industrialisation and the number of patents grew. Most patents lodged in Australia from 1907 to the start of the World War II in 1939 were by companies not individuals. Between 70% and 80% of these patents were taken out by large overseas organisations or their Australian subsidiaries seeking to protect their intellectual property (IP) rights in Australia. Australia was unique among English-speaking countries in its publication of a patent within 6 months of the application being lodged. This applied for both Australian and foreign patent applications. The effect of this was to make important scientific and technical innovations, especially from overseas, publicly available via the Patent Office in Canberra before they were published in scientific or technical journals.

War Breaks Out The Commissioner of the Australian Patent Office had the power to withhold public disclosure of patent information on security grounds. With the outbreak of World War II, this power was used extensively. Under the international convention on IP rights, there was reciprocity of data sharing between patents offices, and the Australian Patent Office became a repository for a vast range of scientific and technical knowledge from around the world. This was of significant potential military value, and the Commissioner used his discretion to protect data of such sensitivity. However, the Patent Office also held many thousands of patents from enemy nations. Despite being at war, there was no right to free use of these patents and the Patent Office continued to require licence approval for their use. Thus, the Australian Government set up a special ‘Custodian of Enemy Property’ for the duration of the war to retain royalty and licence fees for such patents. With the outbreak of war, there was an increase in inventors or would-be inventors offering ideas to help the war effort. Among these many inventors was a young 24-year-old Evelyn Owen who came to the Army ordnance workshops at Victoria Barracks, Sydney with a new machine gun. The prototype was a .22-in. calibre, a

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commonly available small arms ammunition for civilian use. Despite his enthusiasm to offer this new weapon to help Australia’s war effort, Evelyn was rejected by the Army who informed him that they had no interest in the gun. They felt the calibre of bullet used was too small and, despite his explanation that this was only chosen for convenience and could be scaled up, the Ordnance Officer politely told him to go away.

Submachine Guns The first machine guns emerged during the World War I when it became apparent that the close-in fighting of trench warfare made long rifles unwieldy. Further, there was a need for a weapon that could give out a high rate of fire at close range, but still be easily carried by a single soldier. The heavy machine guns then in use were mounted on tripods and required two to three people to fire them. The solution was to adapt automatic pistols, fitting them with longer barrels, butt stocks and higher rates of fire. By the 1920s, a number of dedicated submachine guns had been invented. The most well-known of these were the Thompson, an American weapon that fired a .45-in. calibre bullet, and the Italian Beretta and German MP40, both of 9 mm. The Thompson or ‘Tommy Gun’ became famous as a gangster weapon of choice, as it could fire a lot of bullets and was easily fired from a car or inside a room. When the war started, Australia had only two submachine guns available. One was a German Bergmann machine pistol from the World War I that had been captured as a trophy; the other was an MP-40 that had been seized by Customs in Sydney from the luggage of a German passenger. By 1940, the Army had also bought a single Thompson gun from a rubber plantation owner in the Solomon Islands and brought it back to Australia for use as a training aide. This was the only experience the Australian military had had with submachine guns at the time Evelyn Owen brought his new invention to their depot.

Evelyn Nearly Gives Up A year after his rejection by the Army Ordnance Officer and having heard nothing more from the Australian Government about his invention, Evelyn Owen decided to abandon his idea and make his contribution to the war effort on a more personal basis. By September 1940 he had joined the AIF as a private soldier and was on stand-by to ship out to the Middle East. However, Evelyn could not really leave his idea to be totally abandoned and, in a last desperate effort, he put the gun into an empty sugar bag and left it anonymously outside the home of a neighbour, Vincent Wardell, Manager of the Lysaghts Works Pty Ltd. at Port Kembla. As a manufacturer, Vincent quickly realised the potential value of the weapon for the war effort. He knew it was Evelyn who had developed the gun and took it to the Director General for Munitions, Mr. Essington Lewis, the industrialist who had helped establish the Commonwealth Aircraft Corporation and reorganise Australia’s war industry.

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Mr. Lewis promptly sent the gun to the Secretary of the Army Central Inventions Board, Captain Dyer, who was impressed with the weapon’s potential. Submachine guns were proving very useful in the war, and both the German and Italian armies were making extensive use of them. However, when Dyer sought to take the matter further, he was rebuffed by his senior officers who argued that a similar weapon was being developed in Britain.

A Second Chance Captain Dyer did all he could to get the Owen Gun tested, but the Army’s systems of testing inventions were chaotic due to the war, and he went back to Vincent Wardell to see what private industry could offer. Wardell’s brother was the Chief Engineer at the Lysaghts Works, and he agreed to evaluate the gun on a private and unofficial basis, including the fabrication of additional prototypes. With this reprieve for his invention, Evelyn Owen managed to secure duty leave for a period of 3 weeks. In this time, he worked with Wardell and the Lysaghts team and produced a series of prototypes in various calibres ranging from .32 to .45 in. Firing trials found the smaller calibre, rimless ammunition was the most successful. Wardell approached the Master-General of Ordnance, Major General Milford, for the opportunity to demonstrate the new weapon. After some delays, approval was given and a trial was arranged in Melbourne at which Captain Dyer and Private Owen were present.

Trial by Fire Despite the passion Evelyn had for his invention and the support he had received from visionaries such as Essington Lewis, Wardell and Dyer, the real problems of getting the submachine gun into production had only just begun. At least two major obstacles had to be overcome: • the military customers had to be convinced that the invention could be developed into a reliable weapon, and • the Army high command had to be convinced that such a weapon was required by Australian forces. A major problem facing the Owen Gun’s commercialisation was not that the Australian Army did not believe it needed submachine guns, but that an alternative weapon was becoming available from Britain. As Major General Milford explained to the trial team that the British Army’s experts, ‘with far more experience than was available in Australia’, were now producing a new submachine gun known as the ‘STEN’, modelled on the German MP-40 or ‘Schmeisser’. Australian troops were already using Thompson submachine guns produced in the United States, but these weapons were heavy and their mechanisms were

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complex. If not carefully maintained, they were prone to jamming. Captured MP-40 and Beretta submachine guns were generally considered superior.

Pvt. Evelyn Owen with Owen Gun prototype. (Source: Australian War Memorial)

Owen Gun Versus the STEN Gun The British military had agreed to send a number of STEN guns to Australia, along with full technical drawings and manufacturing details. It was expected that the STEN gun would be a high quality, well-designed and finished weapon of a similar standard to the excellent MP-40. The Owen Gun therefore had a serious rival. Despite this challenge, the Wardell brothers were convinced that the Owen Gun had a future. They had placed Evelyn Owen onto the payroll at Lysaghts and had taken out a patent that offered him royalties if the gun was ever manufactured. However, they faced many problems. Not only was the Army convinced that locally produced guns could not be as good as those from Britain, they could also not agree on the final calibre of bullet for the gun. The Thompson had a .45-in. bullet; the STEN was 9 mm – which was now the standard size pistol round for the British Army. At the time, however, Australia’s armaments factories did not make 9 mm ammunition. What was worse, the Army ordnance officials were not prepared to offer any guidance and felt it best to wait for the arrival of the STEN gun.

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Australian paratrooper with AUSTEN submachine gun. (Source: Australian War Memorial)

The STEN Arrives When the STEN guns finally arrived, they were a disappointment. Rather than the promised British equivalent of the MP-40, the STEN was found to be poorly designed and poorly finished. It was clear that the weapon had been rushed into production and was a cheap, mass produced design. In order to get it rapidly made, …many standards of functional performance were abandoned under the pressure of the grave situation.

The military trials and testing undertaken on the STEN and Owen Guns showed the latter weapon to be far superior to its British rival. As the official report stated: The Owen gun…its outstanding features include: a) extreme simplicity of design and construction, which enabled it to function successfully under difficult service conditions; b) the rapidity with which it could be taken to pieces and reassembled; c) the system of fire control which facilitated economical expenditure of ammunition; d) a tubular stock body and, in later models, a hollow breech bolt; e) high muzzle velocity, which helped to make the gun a very effective short-range weapon. By placing the magazine on top the centre of gravity of the gun was made to coincide with the gun’s longitudinal axis. This gave greater accuracy of fire under fully automatic conditions. Another great advantage was gained from this placing of the magazine: if mud got into the weapon round the breech it would drop straight to the ground; if it entered the magazine it either tended to drop out or was pushed out by the magazine spring. The STEN gun, on the other hand, was loaded on the side and ejected spent cartridges to the other side so that mud tended to lie in the bottom of the casing round the bolt. It was the Owen gun’s ability to operate under muddy conditions that made it superior to other sub-machine guns in the jungle. All these advantages, combined with an unusual simplicity of design, singled the Owen gun out from its contemporaries and its predecessors.

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Going Political Faced with these results, the Army officials were still reluctant to approve the Owen Gun for full scale production, even though the 9 mm ammunition problem was now resolved and quantities of the bullets were being produced in Australia. By this time, the progress of the Owen Gun had reached the attention of the Government, and the Minister for the Army, Hon Sir Percy Spender, gave instructions to Major General Milford to order 100 Owen Guns to be manufactured. Despite the Minister’s direct instructions, the Army Chiefs took no action. The Military Board effectively overrode the Minister and ordered that the guns not be made and that further trials take place. This only served to anger the Minister who demanded that, … the Owen guns are produced and that the first 100 weapons are manufactured to take both 9 mm and .45-inch ammunition and those field trials against the STEN are carried out.

Once it was clear that the Owen was superior to the STEN, the Minister ordered the Australian submachine gun’s production order be increased to 2000 units.

Production Problems Evelyn and the Wardell brothers now felt that they were over the worst in their quest to get the Owen Gun into mass production. However, their troubles were not over yet. Full scale production of the new submachine gun was held up by a lack of access to the machine tools and related equipment needed. There were also many modifications that the Directorate of Ordnance Production was demanding be made to the gun’s prototype. The Directorate wanted design changes that would make the gun easier to manufacture. On 5 November 1941, the Sydney Daily Telegraph newspaper published an article on the progress of the Owen Gun and the delays it was experiencing in production. The newspaper attacked the Army for opposing what was, … a most promising Australian-designed weapon of a kind urgently needed, that was not being developed as rapidly as it should because of Army opposition.

Despite their initial reluctance to adopt the Owen Gun, the Army Chiefs had finally begun to change their minds. However, they still placed an order for 20,000 STEN guns as a backstop should the new Australian-designed weapon fail. However, while the Army was now more favourable, the Department of Munitions was not. They preferred the STEN gun on the grounds that it was already in mass production in the United Kingdom and was cheaper and easier to manufacture. In the Department’s view: … the superiority of the Owen had not been so marked as to warrant its exclusive production.

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They commenced volume production of the British gun which became known as the AUSTEN. The Australian engineers who took on the production of the AUSTEN also redesigned the weapon and found ways to improve its operation by adding back features from the MP-40. The new AUSTEN took only six-man hours to produce compared to the STEN, and could be field stripped and reassembled in only 15 s. The Owen Gun now had a serious competitor.

Into the Field and Fame The Lysaghts team were forced to make numerous changes to their original design, but fortunately few of these required a fundamental change. They also found it difficult to acquire the machine tools and special steels that such a weapon required for its manufacture. However, these problems were overcome and the new Minister for the Army, Hon Frank Forde, became a strong supporter of the Owen Gun, thereby assisting its production. From 1941 to the end of the war in 1945, a total of 50,000 Owen submachine guns were produced. Troops who used both the Owen and AUSTEN guns in the South West Pacific battles gave their approval to the Australian-designed weapon. Evelyn Owen’s invention was considered more reliable; it would keep on firing even if immersed in thick mud and slush. The Owen Gun became the weapon of choice for the front-line troops, and was given the epithet ‘The Digger’s Darling’. In December 1943, the Owen Gun was tested by the British Ordnance Board against a range of other submachine guns including those from Germany, the United States and Italy. The Owen Gun was rated, … first in four of the five tests with five other guns and first in over-all order of merit,

The Owen Gun served on after the World War II and saw active service in Korea, Borneo and later Vietnam, by which time it was being replaced by more modern fire arms. While the Owen Gun became an Australian military legend, its inventor faired less favourably. Evelyn Owen received £10,000 in royalties from the patent rights of his invention. He invested the money in a saw mill near Wollongong NSW where he lived alone. A heavy drinker, Evelyn’s health deteriorated and he died at the age of 33 on 1 April 1949 in Wollongong Hospital as a result of a ruptured gastric ulcer. Perhaps the last word should go to Mellor (1958), the official historian who states: … While the Owen certainly justified the hopes and efforts of those who worked so enthusiastically to have it introduced during the war, it is not difficult to sympathise with the caution shown by Army and munitions officers who were anxious that the country’s production potential should not be squandered in making a weapon about which at that time they had doubts. However, the gamble was successful and the gun proved a major contribution to British small arms design.

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References Haycock, R.  R., & Ross, A.  T. (1987). The Australian Owen Gun Scandal, 1940–1945. Wat & Society, 5(2), 39–55. Mellor, D. P. (1958). The role of science and industry, volume V, Australia in the Ward of 1939– 1945. Canberra: Australian War Memorial.

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Work Book: Planning, Business Models and Strategy

7.1

Learning Objectives

After completing this chapter, you should be able to: • • • • • •

Understand the role and relevance of planning. Understand how to integrate analysis and vision. Understand the fundamentals of building a business model. Identify skill requirements/matches for new ventures. Understand the planning process within an entrepreneurial venture. Understand the nature and role of entrepreneurial risk perception in the planning process. • Apply the planning process to a case analysis.

7.2

Chapter Review

Planning should not be confused with clarity of vision. This chapter examines the relationship between an entrepreneur’s vision and the need to generate a formal business plan. It suggests that a formal business plan is no guarantee for success and that, while planning is important, too much attention can be paid to business plans at the expense of having a clear vision for the business. The business plan is often viewed as a complex document, but it is really a mechanism for helping the entrepreneur systematically communicate their vision to others – either to raise money, secure contracts or organise the work of employees. Of more strategic importance is the ability to create a clear vision for the future. The business plan is also less important than the underlying business model upon which the plan is built. The key elements of the business model are the product, the profit formula, and the key processes and resources. Of particular importance is the © Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_7

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ability to identify a customer value proposition (CVP) that can be sustained over time in a competitive manner. Business plans come in a variety of types, but most need to have a statement of the opportunity, the environmental context, the risk-­ reward, and the team. Ultimately you must use common sense when writing the plan. Entrepreneurs generally don’t plan, at least in a formal manner, and much of the reason for this their propensity to perceive risk differently to others. They use biases and heuristics plus the ‘law of small numbers’ to convince themselves that the risk is less than it might really be. As a result, they plan less but can easily launch into a new venture or invest in an innovation  – thereby seizing first mover advantage. Strategy and planning are not the same. Strategy is a continuous or double-loop process, while planning is a single-loop process. The appropriate planning response for a given situation will differ. Four generic planning responses exist: (i) the shopkeeper; (ii) the salesman; (iii) the administrator, and (iv) the CEO. Each is appropriate depending on the level of uncertainty in the task environment and complexity in the organisational configuration or product/process technologies.

7.3

Key Lessons

• A business plan is a written document that describes the current state and the presupposed future of an organisation. It is usually acknowledged that a good business plan should have at least four key elements: (i) the opportunity; (ii) the environmental context; (iii) the risk-reward, and (iv) the team. • The possession of a business plan is not a guarantee of success and there is mixed evidence that firms with formal plans are any more profitable than firms without as the business plan is largely obsolete the moment it leaves the printer. • The process of planning within the entrepreneurial, innovative venture requires flexibility and recognition that the process is more important than the plan itself. • A formal written business plan is a communications tool designed to inform, guide and sometimes sell a business concept or case to a third party. There are thus at least three common types of business plans: an application for finance (either targeted at the equity market or targeted at the banker), a supply chain driven plan; and a plan for internal use. Each of these applications of the business plan requires slightly different emphasis. • One of the most useful applications of the business plan is simply to guide the management of the business venture. For very small firms, the need for a formal written business plan is probably less important than for their larger counterparts, even if the discipline of writing down the entrepreneur’s thoughts about the venture and its future directions into a coherent documented plan is highly beneficial. • Entrepreneurial ventures in which there are high levels of environmental uncertainty may not benefit from excessive planning and under such conditions, the entrepreneur is better to maintain a more intuitive approach to planning involving continuous learning and ‘sense-making’

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• The business model of an entrepreneurial venture makes explicit the mechanism that can deliver value to a target customer or market segment in a sustainable manner, and with an appropriate allocation of resources to achieve this outcome. • It will thus describe following components: 1. Target customer: how the venture plans to delight the customer by offering them a benefit that they had not expected or even thought of. 2. Value proposition: includes the decision on which customers the business is to serve. The selection of the first customer can be a critical issue. 3. Customer relations refers to the cost of winning and retaining a customer, showing the firm’s basis of differentiation and the unique value proposition. 4. Value capture: how to acquire a sufficient income stream from the value the venture has created. 5. Costs: analyses the balance between fixed costs raising the break-even point for the venture and variable costs more dynamic 6. Resources: the list of skills, abilities and other resources that are likely to be needed to allow the venture to deliver its CVP • Planning should be confused for clear vision: The development of a well-written business plan is no guarantee of success, and an entrepreneur should not assume that just because they like an idea it will be successful. • The development of strategy within a business can be explained in terms of the response its management makes to the level of uncertainty in the task environment and to the level of complexity within its organisational configuration, with four generic strategic planning types that are appropriate responses for a given set of conditions: the shopkeeper (low complexity, low uncertainty), the vendor (low complexity, high uncertainty), the administrator (high complexity, low uncertainty) and the CEO (high complexity, high uncertainty)

7.4

Learning Activities

1. What is a business plan and how should it be structured to achieve the best outcomes for the launch of a new business venture? 2. Consider the business model framework outlined in this chapter and then apply its structure to a new business venture. What issues should the entrepreneur(s) launching the new venture consider with respect to its key elements?

7.5

Individual Research Paper

The purpose of this assignment is to assess your understanding of the concept of the “business model” and how the analysis of this concept within the academic literature has evolved and can be applied to the development not only of new business start-ups, but also new products and services. According to Professor David Teece from the University of Pennsylvania,

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7  Work Book: Planning, Business Models and Strategy … “The concept of a business model has no established theoretical grounding in economics or in business studies” (Teece 2010).

If he is correct, why has so much attention been given to the development and design of business models? Using the text and other reading material that you can source, undertake a critical review of the concept of the business model. Examine the origins, nature and importance of business models for the creation of new business ventures, enhancement of existing ones and the commercialisation of new innovations. Write a research paper of around 2500 words and address the following issues: • Discuss the theoretical foundations of the business model. • Discuss the application of the business model concept to practice. • Access the business model concept’s value to commercialisation of new products and services. • Provide a critical analysis of any weaknesses in the business model concept. • Support your research by providing evidence from academic literature sources.

7.6

Case Study Analysis

Read the case study Comfort Homes, which outlines the story of James, an entrepreneurial manager who rescues a failing business manufacturing transportable houses, and turns it into a highly successful enterprise. However, he now faces a number of opportunities for future growth and needs to undertake a review of his business strategy. Having read the case, and examined it against the material outlined in this chapter, prepare a report for the owner-manager to assist him when preparing a future strategy and plan for the business.

Questions/Tasks 1. What has been the performance of James as an owner-manager? In doing so, consider: • the resources he has had available; • the experience of him and his team; • the control systems he has used; • the ideas and innovation for new products that he has demonstrated, and • the leadership he has shown. 2. How would you profile James – as a shopkeeper, a salesman, an administrator, or a CEO? 3. What is the nature of James’ task environment? Examine this question using the Strategic Development Framework (Figure 7.1 and Figure 7.3 in Chapter 7 of the Textbook) and make reference to:

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• The potential threats, opportunities, weaknesses and strengths James faces in his new market opportunities; • The key considerations James will need to make in relation to his ability to build strong dynamic capabilities within each new targeted market given the resources he has to apply. 4. If James was to prepare a strategic plan for the future direction of his business, what key things should he consider? In answering this, address the structure of his business model using the business model canvas (see Figure 7.1), and what each new strategic opportunity may do to impact on this with specific attention to: • his vision and mission, • his product and customer value proposition, • the profit formula, • the key processes, and • the key resources required.

7.7

Case Study: Comfort Homes

By: Olive Schmidenberg and Tim Mazzarol James felt a puff of pride. Four years in the driving seat and he had turned an ailing building business, trading at a loss, into a multi-million-dollar success story. The end-of-financial-year figures on his desk were proof that Comfort Homes had disclosed a healthy growth in profit for the fourth year running. Not bad for a former building supervisor turned owner-manager. James recalled when he’d first bought the business that he’d boasted to workmate Kevin – now one of his own employees – that a business could not only survive trading cycles and but also grow if it was focused. Well, he’d proved his point.

Old Hands, New Roles Kevin had been cynical about a small business that built steel-framed transportable houses competing in a trading environment dominated by the big boys. He thought James lacked the outgoing, gregarious personality that would win orders, and that his mate’s trade background was insufficient preparation for the role of owner-­ manager. However, James knew all about sour grapes and personal agendas. He believed ownership brought new responsibility and personal accountability—two key ingredients for success in any venture. Kevin didn’t realise that, as owner-­ manager, James viewed Comfort Homes from an entirely different perspective. Being in charge is quite unlike being a paid employee.

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Slow and Steady James was the silent type, but his quiet confidence and straight talk had won him respect from customers, employees and suppliers alike. His business style was careful and considered, like his speech – slow and steady with the long-term view in mind. He never acted on a whim and made few mistakes. True to character, James’ decision to buy Comfort Homes was careful and considered. The business had been trading at a loss for a couple of years, and the owners were desperate to sell. The purchase price was fair, based on the poor trading performance. He paid only for plant and equipment and nothing for goodwill, for the client list or for intellectual property. He was not out to make a fast buck but, as the results demonstrate, his financial success had surpassed many get rich quick schemes.

Minimise Overheads Controlling overheads is always a big concern in the building industry, and many high-profile companies have gone under in the past. James didn’t have deep pockets and he had no intention of taking any unnecessary risks. From day one, he set up a low-overheads business. He minimised his wage exposure (a big cost for any building company) by ensuring all work was done on a sub-contract basis. Although this added a premium to normal award wages, it reduced the company’s exposure significantly in an industry subject to trading cycles. All sub-contractors had to meet fixed quality and delivery standards. As a result, shop floor productivity was high and the company’s sales break-even point was lower than if all tradesmen were on the payroll.

Home from Home In his own quiet way, James was a pioneer in the building industry. He saw a niche in the market and grabbed it. The resources industry was booming. Most mines had a lifespan of 1–10  years, and so it made economic sense to erect transportable homes onsite and then transfer them elsewhere when the mine shut down. Competition between individual mining companies was fierce, and many recognised the link between employee comfort and productivity. James knew from his own onsite experience that employees working in remote locations were more productive and suffered less stress if they had good living accommodation. This ‘home comforts’ concept offered the perfect selling pitch  – the home-away-from-home transportable. Comfort Homes started to manufacture top quality transportable houses for the mining industry. They were constructed with invisible steel frames to look like a real home from the outside. Floor space was optimised to provide comfortable self-­ contained accommodation. Several mining companies tested this superior

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accommodation on their senior employees, and soon others were forced to follow suit in order to attract skilled labour and to reduce staff turnover.

Better Building, Reducing Risk James’ own building competitors soon pirated his ideas, but he just took up the challenge and designed even better transportable homes using the latest building concepts. As a result, Comfort Homes remained at the forefront of the industry. However, Comfort Homes was not quite the high-risk trailblazer that its promotional pitch suggested. The new designs were simply imported residential housing improvements applied to the transportable market. The cost of researching and developing new designs was insignificant in terms of the company’s annual turnover, and the construction methods made economic sense. The transportable houses were manufactured in town where labour costs were low and tradesmen were abundant, and they were then transferred to the mine sites. Quality control was paramount. Each transportable was checked thoroughly by the building supervisor before it left the company premises, as it was easier and cheaper to rectify problems before delivery.

Window of Opportunity James recognised another window of opportunity and began to market Comfort Homes to the rural sector. As farm properties were valued on a per hectare basis, often with little value attached to the homestead, he could see the attraction to canny farmers of erecting a transportable, low-cost home that could be moved when the farm was sold or passed on to the next generation.

Marketing and Management To promote an existing product to a new market is a smart move, even if it is not part of a considered strategic or marketing plan. Kevin’s lack of confidence in the company’s future was based on his perception of James’ personality and his mate’s lack of marketing experience. Marketing was James’ responsibility, and he does not always make time for it. He was a perfectionist and found it difficult to delegate. He realises that, whilst he had steered Comfort Homes to financial success, the company’s marketing was limited to chasing leads in the mining industry and, to a lesser extent, in the rural sector. He had no marketing program aimed at specific industries or geographic regions, and the idea of building business networks had been overlooked. Although at heart he knew it was important, urgent issues always took precedence over the valuable but not-so-pressing need for marketing. Somehow James had to learn to delegate the

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daily, routine tasks to his staff so that he can devote his time and energy to working on the business. Delegation is fine in theory, but difficult in practice. At Comfort Homes, communications between management and staff was poor. James and Kevin had never sat down together to discuss ideas, despite their long years of friendship. Kevin was a long-term employee whose knowledge and skills had not been used to their full potential. James lacked experience in human resource management. He liked to be in control and was not comfortable sharing ideas with employees. On the whole, the job ‘got done’, but his employees never felt that they were part of a team.

Four Factors for Financial Success Despite these in-house management problems, Comfort Homes had performed well in an industry subject to trading cycles. Four factors contributed to this success: 1. James was very astute in financial matters. He ensured that all contracts earned a good profit margin and generated cash flow by way of progress payments invoiced on completion of agreed milestones. Apart from a nominal bank overdraft, the company has no debt. Turnover ran into the millions, but the debtor position at any point in time was insignificant. 2. There was no incidence of bad debt. Most clients were established blue-chip mining companies who paid on time. 3. Demands on plant and equipment were modest, but substantial industrial land was required for construction. Comfort Homes had no capital to invest in property, and had opted to lease suitable premises. James was a model tenant and paid rent at market prices. 4. James was fastidious about product quality. He built a team of loyal, conscientious sub-contractors, and he rarely ventured outside this core team. He ensured sub-contractors were briefed before each job commenced and he always paid his tradesmen on time as soon as they reach the agreed milestones. He almost had the advantage of having his ‘own’ work force without the financial responsibility of having permanent staff.

Quality Control James knew quality control was one of Comfort Homes’ critical success factors. He had spent 4  years complying with Government Quality Assurance requirements, and was critical of his competitors. He believed that they relied on official paperwork to ensure that quality assurance procedures were followed. James, however, preferred to inspect construction first-hand against accepted national benchmarks of quality.

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Future Directions As he contemplates the future and how to expand the business, James is considering a potential new market—to supply transportable homes to the Queensland Housing Commission. As a State Government agency, the Queensland Housing Commission demands Quality Assurance under ISO 9002, but this Government directive irritates James. He believes it is administered by bureaucrats with no idea of the difference between Quality Assurance and quality standards. In his deliberate, considered way he has begun to weigh up the benefits of winning this contract against the hidden costs.

Reference Teece, D.  J. (2010). Business models, business strategy and innovation. Long Range Planning, 43(2/3), 172–194.

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Work Book: Risk Management in Innovation

8.1

Learning Objectives

After completing this chapter, you should be able to: • Understand the variety of risk at different levels in the management of a new venture. • Understand the nature of risk in the innovation process. • Understand the nature of entrepreneurial risk perception. • Understand how to conduct a risk assessment of a venture.

8.2

Chapter Review

This chapter examines the issue of how to manage risk in the process of innovation. By its very nature, innovation is inherently risky. The more radical and disruptive the innovation, the more uncertainty and potential risk is created. However, the management of risk remains an important issue for any manager or organisation seeking to engage in the commercialisation of innovation.

8.3

Key Lessons

• Risk can be measured quantitatively by estimating the likely cost or loss that can arise where an event takes place. It is important to distinguish risk from uncertainty. Risk is something that can be measured in a quantitative manner and assessed. However, uncertainty is not so readily quantitatively measured. • While the area of risk management originally focused on operational areas it has now evolved into a strategic-level activity, Enterprise Risk Management (ERM). © Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_8

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Around the world large companies use ERM as a core element in their strategic planning, project management and budgeting, with full-time risk management executives employed within the senior management team. Risk management in new ventures is often addressed by the entrepreneur and is carried out tacitly, without any specific tools. It is not necessarily subject to a specific investment and its impact on performance remains difficult to demonstrate, so risk management in new ventures has so far not been considered either as a source of specific cost, or as a source of significant value creation. One of the main characteristics of a new venture’s strategy and management is the strong influence of what can be grouped under the name of proximity effects, resulting in filters of perception and action. The informality in the management of innovation creates an ad hoc approach to strategic decision-making including activities such as new product development (NPD) and commercialisation. Another key issue facing small and young firms engaged in innovation is their lack of resources. From a risk management perspective this is problematic because any minor event or anomaly can become a source of crisis by the effects of cascading risks. A key attribute of entrepreneurs is their ability to deal with risk. However, this view has been challenged by those who argue that entrepreneurs don’t have any greater risk-taking proclivity than the average person. What they do have is a propensity to perceive risk differently to others. The effectuation theory suggests that entrepreneurs are more likely to assess their own affordable losses than their expectations of returns, leading them to assess risk taking with a different scale. Many entrepreneurs make use of only limited information. This is described as the law of small numbers, i.e. taking feedback from only one or two key customers or relying on the support of friends and family, to help them decide whether to invest. Planning behaviour is a response to both the perceived risk and uncertainty in the task environment and to the perceived level of confidence and competence within the entrepreneur. Firm’s ability to acquire, assimilate, transform and exploit information and knowledge represents an absorptive capacity that can form the basis of a dynamic organizational capability. Firms seeking to develop new products need to learn how to operate in this often chaotic and unpredictable environment. For most projects the initial stage requires some exploration, experimentation, testing of concepts and theories, and bootstrapping with limited resources. This is all designed to help reduce uncertainty and risk. A formal approach to managing risk can be found in the Australian standard (AS 4360) ‘Risk Management’. This provides a generic and very broad framework for risk management containing six key elements: (i) establish the context, (ii) identify the risks, (iii) analyse the risks, (iv) evaluate the risks, (v) treat the risks,

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(vi) monitoring risks. Other tools like the Failure mode and effects analysis (FMEA) can be used for more technical projects. • Assessing the technical and market risk of an NPD project may be done to determine if a single project should be launched, continued or perhaps aborted, but may also done in the context of managing a portfolio of NPD projects where the focus is not on a single project, but on the selection of the most promising set of projects for an organisation to pursue. • A final tool for management of risk in innovation is Real Options Reasoning, which is an approach whereby the decision maker invests in an option that grants them the right, but not the obligation to make future investments. Such tools are more likely to be used in large firms. • A risk-return model has been developed to provide a quick screening tool for small firms drawing on a model of Innovation Rent from a future innovation that is a function of three variables: Volume, Rate and Length. It provides an Innovation Rent typology helping small firm to assess the opportunity to launch an innovation.

8.4

Learning Activities

1. What are the main factors that need to be considered in managing risk within entrepreneurial ventures? Address this question with reference to the roles played by proximity effects, informality and resource scarcity within small entrepreneurial firms, the nature of risk perception by entrepreneurial people, and how that risk perception influences their planning behaviour. 2. Explain the relationship between absorptive capacity and the management of risk within firms engaged in commercialisation of new technologies. How does absorptive capacity help managers deal with risk and uncertainty? 3. Consider the fuzzy front-end and new concept development concepts proposed by Koen et al. (2002). Explain these and relate their role in management of risk with reference to the assessment of technical and market risk in NPD. 4. Relate the issues discussed in the previous three learning activities to the typology of innovation rents proposed by Santi et al. (2003) and Reboud and Mazzarol (2003) discussed in chapter 8. How might this typology and the staged process of commercialisation outlined in Figure 8.13, be used in conjunction with the concepts described elsewhere in chapter 8 so as to provide a systematic approach to risk management?

8.5

Case Study Analysis

Read the case study Robotics Pty Ltd that tells the story of a small, technology-­ based firm seeking to balance the need to maintain the profitability of their existing product-service portfolio, while simultaneously investing in R&D, NPD and commercialisation of new technology-based products. This is a common dilemma

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facing small firms, who often lack the resources to pursue their opportunities and ideas for new innovations. After reading the case, and with reference to chapter 8, prepare a report for the owner-managers to assist them to identify and understand the risks that face their business.

Questions/Tasks 1. How does the Robotics Pty Ltd case demonstrate some of the common characteristics of small, entrepreneurial ventures? In addressing this question, make reference to: • Proximity effects; • Informality, and • Resource scarcity. 2. With reference to the concepts of entrepreneurial risk perception, absorptive capacity and business planning, discuss how Robert and Claire have approached their NPD and commercialisation processes so far. 3. With reference to the typology of innovation rents, what type of innovation do you think Robert and Claire have created? 4. What advice would you give to them going forward? In preparing this response make reference to: • Fuzzy Front-End (FFE) analysis; • New concept development; • The assessment of technical and market risk; • Risk management principles and techniques;

8.6

Case Study: Robotics Pty Ltd

By: Aniket Maroo “Too much engineering, too little marketing” is how Robert and Claire summarised their company’s position. They were confident their product far exceeded anything comparable on the market, but their faith in the engineering excellence of Robotics Pty Ltd. had failed to translate into a healthy bank balance. Robert relished the challenge of solving engineering problems, but his motivation was not profit driven. As a consequence, the time spent on research and development was disproportionate to the company’s revenue base. As a result, Robotics owned a substantial intellectual property base, but the accounting standards did not permit intellectual property to show as an asset on the company balance sheet and the bank appeared to overlook its value. Was this the key reason Robotics failed to post a healthy profit?

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Humble Birth Like many family businesses, the birth of Robotics Pty Ltd. was modest and unplanned. But the energy, enthusiasm and drive of its husband/wife partnership offset a lack of financial resources. Robert was an engineer turned businessman. Robotics manufactured automated flat-bed cutting machines, but the similarity between the names was pure coincidence. In fact, Robotics’ operations began accidentally in an altogether different field under an entirely different name, IntelliDesign Pty Ltd. Robert had become bored with his job as a mechanical engineer. During the course of a telephone conversation with two old mates from his post-graduate days at Imperial College in London, he secured the Australian rights to distribute IntelliCAD, a suite of software products designed especially for the sign writing industry. Combined with the advent of affordable personal computers, IntelliCAD revolutionised the sign writing industry. Small franchise sign writing businesses proliferated across the country and IntelliDesign prospered.

Dealer Network Robert made all the initial software sales and secured a list of long-term clients, to whom he could provide ongoing support and product upgrades. The first year of business was so sensational he considered opening an office in every capital city in the country. However, Claire’s caution prevailed, which proved fortunate when competition from other products mounted and it became apparent IntelliCAD lacked the “blue sky” potential it had previously exhibited. Instead Robert appointed regional dealers in each of the major metropolitan cities. Based on a simple 30:30:40 formula, he offered a 30% dealer margin on every sale. Each dealer was responsible for local advertising and marketing. IntelliDesign received 30% and the remaining 40% covered costs of sales.

Extended Credit Terms IntelliDesign secured 90-day terms of trade from the software supplier. This was a huge benefit, as all sales were made and monies collected well within the 90-day period, which allowed the new business to build up a surplus cash pool. Unfortunately, this surplus was misinterpreted as business profits before depreciation, due to an absence of monthly financial accounts. In hindsight, this was regrettable for a number of reasons: • IntelliDesign failed to demand timely payments from its dealer network whenever they fell behind with their credit terms. As a consequence, some dealers began to use IntelliDesign as a quasi-banking facility.

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• Robert and Claire thought they had a brilliant accountant because their annual reported results and tax bill were much less than anticipated based on the cash reserve. It never occurred to them to query this apparent discrepancy. • The business failed to budget effectively. As there was always cash around to spend on business development, IntelliDesign experimented with new growth opportunities without proper strategic planning.

Vertical Expansion After 3 years in business and with a steady cash flow from the software sales and support, Robert turned his attention to a vertical expansion of his operation. His mechanical engineering background had enabled him to answer client software support calls by fixing the sign writing hardware. Problems often arose from poorly designed low-grade hardware. The challenge to design and engineer, high quality hardware was too much for Robert to resist. Whilst Robert devoted his attention to the research and design of hardware, Claire stepped into the business to manage the software dealer network. She was so successful at balancing this responsibility with her role as mother of three, that few people would have known the business was shifting direction, if the name had not changed to Robotics Pty Ltd.

Cash Surplus These were exciting times. The cash surplus generated by software sales and support was ploughed back into the business to finance the manufacture of better and smarter flat-bed sign writing hardware, which was marketed through the established dealer network using the 30:30:40 formula. Forty percent covered the cost of manufacture but now, for 30%, the dealers were required to promote and install the hardware on delivery at clients’ premises and to provide a 3-month after-sale support service.

Enhanced Performance Robotics was driven by the engineering excellence of its flat-bed sign writing hardware and strove to improve and enhance product performance. The hardware was keenly priced and, in Robert’s view, the best value on the market. Yet most sales were achieved either by trimming the price further or by making specific modifications for a nominal extra charge. Robert saw each customer requested modification as a further engineering challenge and costed jobs on the nominal time rather than the actual time taken. However, most modifications were client specific, requiring research, experimentation and

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individual development. They did not translate into a body of knowledge that could be copied for other customers to save time and costs.

New Markets Aside from sign writing, Robert identified other industries where he could modify automatic flat-bed hardware, such as cutters for wood, metal, fibreglass and cloth. In essence, each cutter comprised the flat-bed, a cutting mechanism (blades, routers or laser beam) and an automatic controller. However, Robotics had no formal marketing plan and devised no new marketing initiatives. The company simply continued to advertise in the sign writing industry magazine, participate in trade shows and rely on any direct marketing undertaken by its dealer network.

Costs Robotics’ retail price for flat-bed hardware was in the order of $25,000, made up from the following components: Flat-bed hardware and cutting tool Controller Robotics profit Dealer profit

$9000 1000 10,000 7500 7500

40% 30% 30% 100%

Intellectual Property Protection Robert could have patented his flat-bed hardware designs, which were easy to copy by reverse engineering. To save time and money, he devised a simple solution to protect his intellectual property. In effect, each controller was just a small black box implanted with programmed instructions. It was impossible to duplicate these controllers without Robert’s assistance. Irrespective of the cutting application (wood, metal, cloth etc), the controller boxes looked identical, but their capacity was determined by the implanted software.

Body with No Brain A large share of expenditure went into the research and development of the controller boxes, but the cost of production was negligible compared to the cost of the

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flat-bed cutting unit as a whole (see table above). The hardware production, which could be copied and manufactured by any able machine shop, generated most of Robotics’ growth in terms of rental space, employees, stock holding, debtors etc., but the controller box gave it value. In Robert’s words, With no controller box, the hardware is just a pile of metal with little commercial value, like body with no brain.

Systems Lagged Behind Growth When Robotics moved into hardware manufacture, Robert and Claire failed to realise their accounting systems and credit control policies had not kept pace with the company’s growth and new direction. Due to their lack of skill in product costing, Robotics sold a superior product for the same price as the competition. The retail price was market not cost driven and the gross margins were mediocre. Robert and Claire also fell into a common trap. They assumed all was well because Robotics seemed to be making a profit, but they overlooked the key area of working capital management. Evidence suggests many profitable businesses go under because they neglect this issue.

Decreasing Liquidity During the days of software-only sales, company credit policies evolved that gave unofficial extended trading terms to the dealer network. Naturally, the dealers utilised these terms when purchasing hardware. This drained Robotics of its liquidity, because the trading terms for imported materials were either payment on delivery or at best 30 days. Labour was paid weekly, as incurred. The company’s liquidity position changed from a healthy cash surplus to delayed creditor payments in a space of 2 years.

Product Profitability Re-examined The cost table shows that Robotics’ flat-bed hardware returned $7500 for every $10,000 invested in manufacturing, or a gross margin of 42.9% on the dealer price of $17,500. The company was drained of its liquidity because it spent $10,000 before it saw its share of profit, after the dealer received his sales cheque. For an ongoing manufacturing operation, a gross margin of 42.9% would be considered an adequate return. However, for a technology company needing to re-invest its receipts back into further R&D, it left nothing for growth or working capital management.

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Inefficiencies and Lost Orders The lack of sufficient working capital created inefficiencies in the business and resulted in lost orders. Many raw materials used to manufacture hardware were imported, with a two-to-three-month lead-time. Without sufficient stock on hand, Robotics was forced to order from suppliers after sales orders were received. This created delays in delivery that intensified the working capital deficiency. In addition, the company lost orders to competition when deliveries could not be guaranteed within a customer’s time frame.

Search for Extra Funds Robert and Claire believed their financial problem was only a temporary glitch and they applied for a bank overdraft facility of $50,000. The facility had to be secured on company assets, but because Robert and Claire had ploughed all their profits back into the business, they had no bricks and mortar property to offer as security. From the company’s summarised financial results, it was evident Robotics’ turnover had doubled in a space of 3  years, but net profit results were static and the company’s liquidity had eroded. The bank concluded that the liquidity problems were due to diminished owner participation and increased personal drawings. A full examination of the company’s position was overlooked and the overdraft application was refused.

A New Beginning Various issues have emerged from this story and Robert and Claire have decided to seek advice. They assumed the market knew their products, due to their reputation of engineering excellence, but this amounts to nothing if the company is unknown. The biggest challenge now facing Robotics is to switch direction yet again, from a focus on design and development to management and marketing. Robert and Claire’s business educations are about to begin.

References Koen, P. A., Ajamian, G. M., Boyce, S., Clamen, A., Fisher, E., Fountoulakis, S., Johnson, A., Puri, P., & Seibert, R. (2002). Chapter 1: Fuzzy front end: Effective methods, tools and techniques. In P. Belliveau, A. Griffin, & S. Somermeyer (Eds.), The PDMA tool book 1 for new product development. New York: Wiley. Reboud, S., & Mazzarol, T. W. (2003). Risk assessment in SMEs, a proposed tool. Cashiers du CEREN 4(2003), 31–45. Santi, M., Reboud, S., Gasiglia, H., & Sabouret, A. (2003). Modèle de valorisation et de protection intellectuelle des innovations des PEI. July, HEC/INPI, 63p.

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Work Book: Disruptive Innovations and the Commercialisation of Technology

9.1

Learning Objectives

After completing this chapter, you should be able to: • Understand how to identify emergent, disruptive technologies. • Understand whether ventures need to spin out new ventures or can capture their value. • Appreciate the pivotal role of customers. • Understand how new ventures can ‘create new market space’. • Appreciate how innovation management frameworks intersect and contradict strategy and marketing frameworks. • Understand how innovation occurs in products and services as well as technology – at all stages and sizes of ventures.

9.2

Chapter Review

This chapter examines the role of innovation as a key economic driver and the nature of radical or disruptive innovations as a major source of new technological products and processes. It examines the theory and practice of strategic management of innovation, and the generation of innovation value through the adoption of a Blue Ocean strategy. Technological innovation involves significant improvements in product or process performance and generally has a higher level of risk associated with it. Historically, technology has played an important role in the success of entrepreneurs, but in recent decades it has accelerated in its importance. The adoption of new technology must take into consideration both the organisational customer’s needs, and those of the individual end-user. Because radical innovations frequently challenge the existing industry paradigm, it may be difficult to © Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_9

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get a clear market signals from end-users. New technologies must not only offer significant improvements in performance, but may need to create entirely new markets. To secure acceptance of radical innovations, it is frequently necessary to form strategic alliances with producers of enabling technologies. The risks associated with the commercialisation process may require the formation of new project teams or spin-off ventures. New product development requires a dual track approach, with technical and market analysis taking place simultaneously. Ultimately, the success of a new technological innovation depends on its ability to generate above average rents, which require above average sales volume, profit margin and a long product lifecycle.

9.3

Key Lessons

• The radical or disruptive innovations are those that produce fundamental changes in the activities of an organisation or an industry, and represent clear departures from existing practices. Such innovations usually lead to increasing uncertainty within industries, and serve to transform either the firm or the industry itself. • The United States continues to dominate the global research landscape with the largest number of scientific articles authored or co-authored by researchers from that country. However, other countries are rapidly emerging to challenge this dominance. China is the most significant of these. • Since the 1980s, the focus has shifted to the technologist-entrepreneur with technology-­driven firms emerging. Even well-established firms have focused their resources more on finding technology-driven strategies to maintain their competitive advantage. Firms in the low technology industries usually have little difficulty with the management of technology, but this is not generally the case with their counterparts in the medium and high technology areas. The two main issues that managers must deal with are: product proliferation; and technology substitution. • The key to successful technology management in technology-driven firms is good project management. Key elements of innovation management can be identified as: 1. Inputs (people, physical and financial resources, tools); 2. Knowledge management (idea generation, knowledge repository, and information flows); 3. Innovation strategy (strategic orientation and leadership); 4. Organisation and culture (culture and structure); 5. Portfolio management (risk/return balance, optimisation tool use); 6. Project management (project efficiency tools, communications and collaboration), and 7. Commercialisation (market research, market testing, marketing and sales). • Four generic types of innovative firms have been described: 1. Technology innovators – those that introduce new generic technologies into existing markets;

9.3  Key Lessons

• •

•

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2. Application innovators – those that apply existing technology in established markets; 3. Market innovators – those that develop new product concepts by combining them into existing markets; 4. Paradigm innovators – those that produce new product concepts with completely new technology. With application innovators and technology innovators being the oldest and largest among these four groups of firms and the largest potential for growth being found among market innovators and paradigm innovators. Six issues are important when considering disruptive technologies: 1. First, the pace of technological change in most industries outstrips the customers’ ability to make use of improved versions of a product. 2. Second, higher profit margins can be secured by moving products from lower yield markets to upmarket customer segments. 3. Third, the notion of providing incremental innovations to keep established markets satisfied with established technologies is not a disruptive process, but rather a sustaining one. 4. Fourth, established market players are likely to win if they choose to compete vigorously against new entrants – even if the new entrants launch new technologies. This is due to the stronger level of resources usually available to the established firms. 5. Fifth, disruptive technologies are often attractive to customers that are not themselves attractive to the established market players. This allows the new entrant firm to secure a niche. 6. Sixth, the opportunity for new growth can be found in disruptive technologies due to the lack of interest that is often shown by established firms towards such innovations. The process of developing disruptive technologies involves distinct successive competences: 1. The ability to screen the disruptive technologies from among the field of emerging new ideas. 2. To adequately define the significance of the disruptive technology. 3. To find a market that can adopt the innovation. 4. To locate the responsibility for the new innovation in a small, independent organisation. Disruptive technologies, by nature, are unlikely to respond to traditional marketing approaches. Where no pre-existing market can be found for a new product or service, the challenge for marketing is to create the market using selective strategies designed to gain the most cost-effective market diffusion pathway. The strategy of seeking to create new value as a Blue Ocean Strategy, as opposed to the Red Ocean Strategy where firms are competing directly one with another. In a Blue Ocean Strategy, four criteria need to be considered relating to what should be raised, reduced, created and eliminated.

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1. The issue of what should be raised relates to the gaps that are currently to be found within the existing product/market offerings and what the company might offer that would raise value for customers. 2. The issue of reducing below industry standards reflects the tendency for many product or service offerings to be overly-complex and expensive when first introduced. • Several tools have been designed to better approach the management of NPD. 1. The Stage-Gate® process is a systematic step-wise approach to the management of NPD, but also of the risk associated with commercialisation of an innovation. It involves the movement of the innovation through a series of stages and gates where “GO/KILL” decisions. 2. The Lean Start-Up process emerged around a cycle of Adapt-Innovate-Batch-­ Grow and focuses around five basic principles: entrepreneurs are everywhere; entrepreneurship is management; validated learning; build measure learn; innovation accounting. 3. The Rent Model described in Chap. 8, with each of the eight innovation rent configurations having different potential commercialisation pathways. The more disruptive the innovation the more challenging these issues become.

9.4

Learning Activities

1. Critically assess the argument outlined by Bower and Christensen (1995) in their paper on disruptive technology. Do you agree that new market space can be created by focusing on disruptive rather than sustaining innovations? And, what application do the theories of Kim and Mauborgne (1999) have in guiding this process? 2. If the securing of above average RENT is the key focus of a new innovative technology, what should a technopreneur from a small high technology firm consider when assessing the merits of their proposed innovation? Discuss with reference to the RENT model outlined in Chap. 8.

9.5

Case Study Analysis

Read the Davies Craig EWP case study, which provides an example of a new technology seeking to achieve commercialisation. Once you have read the case, and reviewed the contents of this chapter, you should then answer the following questions.

Questions/Tasks 1. What were the key technical and marketing problems facing Davies Craig in trying to commercialise this product?

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2 . Try to classify the EWP against the RENT model, and define its type. 3. You were asked to provide advice to Davies Craig for developing a commercialisation strategy drawing on the concepts outlined in this unit, what key issues would you focus on?

9.6

Case Study: Davies Craig EWP

By: Tim Mazzarol Australian company Davies Craig Pty Ltd. developed the electric water pump (EWP) to replace existing belt-driven pumps. The new pump offers enhanced power and improved cooling. The new pump can be retro-fitted to almost all cars, trucks, buses and boats. The company was the originator of electric radiator fans into Australia and the US during the 1970s, and developed the EWP at a cost of $1.2 million (see Fig. 9.1).

Solving the Problem of Engine Overheating According to Davies Craig Managing Director Richard Davies, the problem with all existing mechanical water pumps is that they are slaves to the engine speed and run when not required. They also reach very high speeds when the engine is accelerating through the gears and reduce the power available to the drive wheels. Mechanical pumps also operate poorly when the vehicle is stationary or idling, particularly in high ambient temperatures. Coolant flow rates drop significantly, and power to the pump increases due to higher flow resistance in the radiator. The Davies Craig electric pump operates at its maximum efficiency design rate of 80 l/min when the full 12 volts is applied to its motor. However, in most situations Fig. 9.1  The Davies Craig electronic water pump. (Source: Davies Craig 2003)

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even that rate is more than necessary, so the system is fitted with an electronic controller that senses the engine temperature and varies the pump speed to precisely control the set temperature. Power usage for the EWP is much lower than for conventional pumps.

The EWP as an After-Market Solution The EWP can be retro-fitted to any existing vehicle for around $280 by cutting a section of the lower radiator hose out and inserting the pump. The engine thermostat is removed and the EWP acts as the thermostat. According to Richard Davies: The pump conversion kit and the smart controller option will both carry a two-year warranty. The modification involves removing the mechanical pump, pulling off the impeller from the pump shaft, and re-installing the mechanical pump housing and its belt. Now the pump is an idler pulley doing no work and causing no drain on the power to the wheels. Alternatively, you can just delete the water pump pulley from the belt system.

Racing Cars as an Initial Early Adopter The first niche market secured by Davies Craig was the racing industry. High performance racing car owners were keen to adopt any innovation that might boost the power output from their engines. Such customers were also not price-driven, and were used to adopting new technologies to achieve a competitive edge. As Richard Davies explains: Drivers will notice an improvement in acceleration and performance, especially in the top rev range, and a better control of engine temperature along with an increase in cooling capacity and a fuel saving – especially when high speed cruising and in the city. A five-litre V8 engine could produce an extra 8% to 10 % power at the drive wheels. Maximum engine speed is increased and automatic gear changes are sweeter.

But the biggest boon will be to engine life because the electric pump can be programmed to run on after a hot engine shut down for less than a minute, which is more than enough to wash out built up heat from the engine block.

Vintage Cars as Another Niche Customer Another target customer was owners of vintage cars, which tend to overheat on hot days. These owners are less motivated by power output than the desire to protect their valuable engines from damage. Like racing car owners, they are not price driven. According to Richard Davies: Demand for the pump is expected to come from performance, off road and vintage vehicles with overheating problems. Owners of vintage cars, which tend to overheat on hot days, are

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set to benefit greatly from the EWP. They will be able to add the pump to the existing system to supplement cooling and protect precious vintage engines.

The pump motor of the EWP has enough torque for the impeller to crush rust particles found in some old engines. The unit will withstand heavy salt road spray, but total immersion – such as in a river crossing – should be kept to a minimum unless the motor is sealed.

Offering Superior Performance As shown in Fig. 9.2, the performance improvements offered by the new Davies Craig EWP had to be significantly greater than those offered by existing belt-driven water pumps. The low cost and high reliability of the conventional belt-driven systems had to be offset by the new technology for it to be considered worth spending the additional money on. The performance improvement trajectory of the EWP had to be at a rate higher than the anticipated incremental performance enhancement of existing technologies. The decision to select the vintage and racing car target markets enabled Davies Craig to find potential early adopters who found the EWP system’s benefits of greater value than any potential cost associated with the replacement of existing technologies and the disruption this would cause. Because electric water pumps are new and have no established reputation in the market, Davies Craig has ‘over-engineered’ the pump to prove its reliability. It can

Fig. 9.2  The Davies Craig EWP market assessment

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withstand the harshest operating conditions and coolant types. Weighing only 800 g and using only 6 amps of power, the device can operate in temperatures ranging from −26 to 140 °C, and pressures of 50 psi. According to Richard Davies: We cannot afford to have one pump fail in the heat of battle. The way technology is exploding in the auto industry these days, it may be only ten years before most cars have electric water pumps.

References Bower, J. L., & Christensen, C. M. (1995). Disruptive technologies: Catching the wave. Harvard Business Review, 73(1), 43–54. Chan Kim, W., & Mauborgne, R. (1999). Creating new market space. Harvard Business Review, 77(1), 83–94. Davies Craig Pty Ltd (2003). www.daviescraig.com.au company website.

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10.1 Learning Objectives After completing this chapter, you should be able to: • Understand the main causes of innovation failure. • Understand the importance of listening to the voice of the customer. • Understand the fundamentals of the customer discovery and validation processes. • Be able to develop a customer archetype and customer value proposition (CVP). • Appreciate the need to keep the NPD and CVP processes closely connected. • Understand the factors likely to erode the sales, profitability and lifecycle of an innovation. • Be aware of the main tools and techniques that can be used to screen opportunities and assess markets during the NPD and commercialisation process.

10.2 Chapter Review This chapter examines the process of screening opportunities for new product development (NPD), and the importance of undertaking detailed market assessments of the customers’ needs and wants. It discusses the use of a range techniques and associated concepts including voice of customer, quality function deployment (QFD), Kano analysis, CAGE modelling, customer archetyping, product concept development, and product-technology road mapping. The chapter also provides an © Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_10

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overview of how this screening and market assessment process can be undertaken with reference to many of the concepts covered in Chaps. 7, 8 and 9.

10.3 Key Lessons • There are at least six common causes of failure in the management of NPD and commercialisation projects: (i) failure to anticipate and act with sufficient speed to changes in the external market and industry environment; (ii) failure to develop appropriate product development road maps and project management systems; (iii) failure to develop coherent business models; (iv) failure to secure technology leadership; (v) failure to secure product leadership; and (vi) failure to gain access to the market. We discuss each of these issues in the following sub-­ sections as they provide a useful starting point for understanding why some firms fail to adequately screen opportunities and assess markets. • The customer development process involves an initial search phase followed by an execution phase. The project team must first go through a stage of customer discovery to develop theories about the customer’s needs and wants, then test these theories, develop a minimum viable product (MVP), test it with early adopters, and use this to validate or refute their theories. Depending on the results they will need to either pivot or persevere. • Customers’ willingness to adopt a new innovation are likely to be influenced by five factors: (i) the relative advantage that it offers over existing solutions; (ii) its compatibility with existing technologies; (iii) whether or not its complexity makes it difficult to employ; (iv) whether it can be trialled prior to adoption, and (v) how observable its benefits are. In addition, customer will be influenced by their awareness of the new product, as well as its attractiveness, affordability, availability and accessibility. • Developing a customer archetype involves seven stages: 1. Segment the target market. 2. Define the customer problem. 3. Define the customer type. 4. Identify the customer’s wants & needs? 5. Assess how the customer can benefit from the product? 6. If an organisational buyer, prepare organisational and customer influence maps. 7. Review the Business Model Canvas. • A customer’s perception of value is a trade-off between their perception of the benefits a new product or service offers, against the perceived sacrifices that they must make to acquire it. Customer perception of value is complex and relative. Factors likely to influence the CVP are the attributes, benefits and costs of the new product or service. • The process of listening to the voice of the customer (VOC) is a fundamental part of any NPD process and has been built into a range of systematic approaches used widely by large firms. These were initially developed in Japan in the 1950s

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as part of the total quality management (TQM) systems, but are now used globally. They include: 1. Quality Function Deployment (QFD) – a process of integrating marketing and R&D technical activities throughout the NPD process. This includes the House of Quality analysis to trade-off VOC customer feedback against technical and product design attributes to generate an optimal final product. 2. Kano model analysis – developed by Professor Kano from Tokyo University, this model maps a product or service’s attributes on the dimensions of high-­ low technical performance versus high-low customer satisfaction. It identifies features and attributes that are basic must-be present but not offering any satisfaction; attractive, and able to offer a high satisfaction if present, plus those that satisfy when present and dissatisfy when absent, as well as those that the customer is indifferent about. 3. VOC CAGE Model – this model maps the attributes that are obtained from customer research and examines them against the attributes the design team has already identified, placing them into the givens that must be present, while identifying opportunities for new exciting features and attributes. 4. Many techniques can be used to undertake VOC research. They include focus groups, in-depth interviews, brainstorming, ethnographies, collaborating with lead customers and crowdsourcing. Analysis of data collected can be undertaken with techniques such as affinity diagrams. • The Stage-Gate® approach to NPD involves an initial discovery stage that builds on ideas that have emerged from the fuzzy front-end and progressed through the idea screen. They are subject to preliminary technical, market and financial assessments, before being scoped into business case. Here the product design and definition work are undertaken, which considers all the major features and attributes that market research has indicated will provide an attractive CVP. • Once the product definition phase is complete the go to development phase of the NPD process continues and a product-technology road-map should be developed. This provides a visual mapping, using a Gantt Chart, that shows the concurrent development time-lines for the R&D, IP rights, technology, product and market activities required to achieve commercialisation.

10.4 Learning Activities 1. Review the main causes of failure in the process of commercialisation identified by Deschamps (2017). Research examples of product failures and consider if they demonstrate evidence to support his views. What should managers of businesses engaged in or wishing to undertake new product development (NPD) and commercialisation do in order to avoid falling into these traps? 2. Read York and Danes (2014) paper and the summary of their work (see Table 10.5 in chapter 10). Review the material outlined in chapter 9 relating to the different approaches to screening opportunities and assessing markets, as proposed by the Customer Development (CD) (Blank and Dorf 2012), Fuzzy

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Front-End (FFE) (Koen et al. 2002), and Stage-Gate® NPD processes. Draw up a list of the similarities and differences between these approaches, and try to summaries a best-practice model drawing together the strengths of all three.

10.5 Individual Research Paper The purpose of this assignment is to assess your understanding of the theory and practice of new product development (NPD), in particular the Stage Gate process of NPD outlined by Robert Cooper and Scott Edgett (Cooper 2006, 2008, 2017, 2019; Cooper et al. 2008). According to the Chairman of Proctor & Gamble: … Innovation is a prerequisite for sustained growth and no other path to profitable growth can be sustained over time. Without continual innovation, markets stagnate, products become commodities and margins shrink.

However, although new products account for as much as 50% of annual profits, and two thirds of all sales in some industries, the success rate of many new products is poor. Using the text and other reading material that you can source, undertake a critical review of the theory and practice of NPD with particular attention to its application to small and large firms. Write a research paper of around 2500 words and address the following issues: • Discuss the theoretical foundations of the new product development (NPD), e.g. Stage-Gate® process. • Discuss the application of NPD processes to SMEs and large firms. • Access the role played by the NPD process in commercialisation. • Provide a critical analysis of the Stage-Gate® process. • Support your research by providing evidence from academic literature sources.

10.6 Case Study Analysis Read the case study Nokia Sell’s Out, which tells the story of how Finland’s Nokia Corporation grew into the world’s leading mobile telephone manufacturer, only to be impacted by the entry of Apple and the iPhone into the market. The case provides lessons for how even the most successful and global firms, can quickly find themselves in trouble by failing to adequately screen opportunities and assess the trends that are taking place within their markets. This can be particularly the case where technological change disrupts the status-quo within an industry or market. Having read the case study below, reviewed the contents within this chapter, and the material, particularly from Chaps. 6, 7, 8, and 9, address the questions below.

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Questions/Tasks 1. Deschamps (2017) suggests that the majority of failures in the management of innovation within large firms can be attributed to at least six “classic root causes of innovation failure.” What are these causes, and how were Nokia’s problems caused by them? 2. With reference to the Huijser innovation success formula, explain the probability of Nokia achieving market success against Apple in the smartphone market. 3. How and why did Nokia fail to keep the alignment between their NPD and CVP processes in relation to the smartphone? 4. With reference to the case, consider how Nokia might have avoided the problems they experienced with their NPD process in responding to the emergence of the Apple iPhone. In doing so make reference to the following: • Listening to the voice of the customer and VOC research. • Following the Quality Function Deployment (QFD), House of Quality framework for product design. • Using Kano model analysis. • Using CAGE model analysis. • Working systematically through the integrated product definition process (see Figure 10.16). • Using product-technology road-mapping. • Applying the techniques of: (a) New Product Development Stage-Gate®; (b) Fuzzy Front-End (FFE), and (c) Customer Development (CD).

10.7 C  ase Study: Nokia Sells Out: The Rise and Fall of Nokia Mobile Communications Author: Tim Mazzarol (Mazzarol 2013) In June 2006 Nokia Corporation was the world’s leading manufacturer and supplier of mobile phones. The company was viewed as the market leader in mobile telecommunications. Nokia’s strategic vision had seen it grow within a period of 14  years from a relatively small diversified electronics manufacturer based in Finland, into a multinational company. However, by February 2013 Nokia had sold its mobile handset business to Microsoft and essentially exited from the mobile phone market. What happened?

Nokia’s Rise to Global Dominance The origins of Finland’s Nokia can be traced back to 1865 when the company was founded by Fredrik Idestam and Leo Mechelin as a pulp and paper manufacturing business near the town of Tampere, then part of the Russian Empire. By the 1870s

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the company was engaged in the generation of hydroelectricity and by the early twentieth century it was a major producer of rubber products and cables for telephone, telegraph and electricity. This latter opportunity emerged from the company’s ability to provide the rubber insulation required for these products. During World War I Nokia supplied rubber boots and telephone cables to the military, but was nearly bankrupt by the 1920s. It was subsequently restructured and continued to supply military contracts during World War II. After that war Nokia supplied cables to the Soviet Union as part of Finland’s war reparations. This helped Nokia to develop its product portfolio to include paper products, car and bicycle tyres, footwear (rubber boots), communications cabling, television sets, electricity generating equipment, personal computers, other consumer electronics and military communications systems. By 1967 Nokia Corporation was a diversified industrial conglomerate in which each strategic business unit had its own Managing Director who reported directly to the Corporation’s President Björn Westerlund. Its foray into electronics had commenced in 1960 under his direction when he was MD of the cable works division. During the 1970s Nokia began to develop its competence within the telecommunications sector. This initially took the form of the DX200, which was the world’s first digital phone switching system. Then in 1972 the first mobile phone system was produced as part of an order from the Finnish Army. Throughout the 1980s Nokia expanded under CEO Kari Kairamo, but by the end of that decade it was once again experiencing problems. The company was facing significant financial losses, particularly in its television manufacturing division and the corporation was viewed as having diversified too much. So serious was the pressure that Kairamo committed suicide. He was replaced by Simo Vuorilehto who served as both Chairman and CEO. Under Vuorilehto the company was significantly restructured. In 1988 Nokia divested itself of its tyre division, Nokian Tyres, and by 1990 the Nokian Footwear business was also divested. A severe recession hit Finland in 1990–1993 and the Nokia television and personal computer divisions were then sold. However, the real change took place in the 1990s with the appointment of Jorma Ollila as Nokia’s CEO in 1992. Ollila made the decision to focus Nokia’s business strategy entirely on mobile telecommunications. This required the company to sell-­ off all its business units that had no part in this future direction. Throughout the 1990s Nokia shed its rubber, cable and consumer electronics divisions despite their long-term relationship with the company. A key part of the strategy set by Ollila was to ride the wave of mobile telecommunications that he could see would become a growth industry in the coming decades. His vision for this was articulated by Nokia within their vision statement: “Voice Goes Mobile”. This was corporation’s guiding strategic direction throughout the 1990s. Nokia’s vision statement reflected the anticipated trend for telecommunications to move from fixed to mobile lines. However, this new strategy was risky. Nokia was putting all its fortunes into the mobile telecommunications basket, which was a

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market space that was already attracting major competitors such as Ericsson and Motorola. Over the decade that followed Nokia’s risky strategy paid off handsomely. By 2004 Nokia had secured a key place in a global market with over 1.6 billion phone subscriptions. There were more mobile phones than fixed lines and many developing economies such as China and India were major growth markets. As Nokia looked at the future of its markets the outlook was very optimistic: Growth is being driven by the ongoing boom in new subscribers in Latin America, Russia, India and China, as mobile communications continue to become more affordable and widely available. We expect growth in these markets to be a main driver for global mobile subscriptions, reaching approximately 2 billion users by the end of 2005 and approximately 1 billion users by 2010. (Nokia 2004)

Life Goes Mobile In 2006 Ollila left Nokia to take up the helm of Royal Dutch Shell. His replacement was Olli-Pekka Kallasvuo. However, before leaving the company Ollila refocused Nokia’s vision to “Life Goes Mobile”. This took place in 2004 as part of a major corporate restructure of the company’s networks and equipment division, responsible for the mobile phone infrastructure (e.g. towers and base stations). This division was eventually merged with Germany’s Siemens in 2006 to form the world’s third largest “networks” business. This change of vision reflected the convergence of voice-based mobile communications with the new data-driven applications including multimedia, online services. Nokia was already actively engaged in this market and had equipped its phones with high quality cameras and other multimedia technologies. The company was clearly anticipating that the future would be focused on the “smartphone”, as stated in the company’s reports: A smartphone is a new category of mobile device that can run computer like applications such as email, web browsing and enterprise software, and can also have built-in music players, video recorders, and other multimedia features. The global smartphone market is expected to grow from around 22 million units in 2004 to more than 50 million units in 2005 and represent approximately 25% of the total global mobile device market volume in 2008. Some of these markets overlap with each other. In the longer term, we believe that applications such as music, mobile games and mobile TV will be taken widely into use. (Nokia 2004)

Nokia’s strategic planning could foresee the emergence of the multimedia smartphone. It also recognised that such technological convergence was likely to lead to a fundamental shift in the overall structure of the industry. This would see mobile communications, information technology, media and consumer electronics industries converging together. There was also recognition that the mobile phone was going to be a point of convergence for email, web browsing, and music downloads,

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radio, cameras, wireless LAN, Bluetooth and other technologies. However, the challenge for Nokia was to develop a strategy to maintain its competitive edge.

Enter the iPhone During 2006 a group of Nokia managers were engaged in a strategic management training program run by UWA Business School in Tokyo. They were discussing the process of strategic change in their industry and the instructor asked them to consider future trends created by the convergence of voice and multimedia technology. At the time their main competitors were Motorola and Ericsson. The managers discussed the problems facing Nokia with their Symbian operating system (OS). This was a reliable and proven software platform for mobile telephony. However, it lacked many of the features needed to truly embrace the full multimedia future. Then one manager – an American – made the observation: One day someone will put an aerial in an iPod and then it will be game over.1

The following year Apple launched its iPhone and Nokia’s position in the mobile telecommunications market began to slip. The rise and rise of smartphone technology left Nokia without the leadership position that it had once enjoyed. Caught in a catch-up mode Nokia fought back with new products such as the Lumia 520. However, the growth of Apple’s iPhone market share continued to rise from its launch in 2007. By 2008 it was being sold globally and the number of iPhones sold per  annum grew from 1.46 million in 2007 to over 125 million by 2012. Other competitors such as Samsung and HTC also entered the smartphone market using Google’s Android OS. One of the problems facing Nokia was that its Symbian OS was not designed to handle the multimedia environment that the smartphone market required. This was also a problem for Blackberry and the other former key competitors Ericsson and Motorola. Apple’s iPhone began to erode the markets for these products, including Nokia’s premium brand Vertu. In 2007 Nokia’s leading smartphone product was the N95, a multimedia phone of high quality that contained a Zeiss 5-megapixel camera and a larger colour screen. However, the N95 was still a slide phone with keys and lacked the smooth simplicity of the iPhone. In 2008 Nokia launched the N8500 with a touch screen and enhanced camera and music/media features. In 2010 the Nokia N8 was released with a 12-megapixel autofocus lens and a Symbian3 OS. This touchscreen smartphone offered many of the features of the iPhone in look and functionality. However, it was still not able to recover the lost ground. During 2008 Nokia announced to its shareholders that it was to focus away from mobile communications and onto the internet. It described Apple, Google and Microsoft as not being “natural competition”, but “major important players to deal  Personal experience of the author.

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with” (Kallasvuo 2008). However, by the end of that year Nokia had ceased mobile phone sales in Japan (a market in which it never had a strong market share), although it continued to maintain R&D centres in that country. In 2009 Nokia sold its network security business to Israel’s Check Point Software Technologies Ltd. By February 2012 Nokia commenced laying off over 4000 employees as it shifted manufacturing from Europe to South America and Asia. In 2010 Google’s Android OS was adopted by both Samsung and Sony Ericsson leaving Nokia as the only manufacturer still using the Symbian OS. By 2011 Nokia was aware that its Symbian OS was no longer able to support the smartphone market. Further, Nokia was unable to compete with the additional market benefits offered by Apple via its iTunes App store and the smooth connectivity between the iPhone and other Apple computer products such as the iPad. Nokia had already started to offer non-Symbian OS platforms such as the Linux-based Maemo OS. It also sought to offer content and applications via its Ovi online store.

Enter Microsoft The open source community-driven Maemo OS was subject to market adoption issues and in 2010 Nokia joined with Intel to create the MeeGo OS. This merged Maemo with Intel’s Moblin OS.  Yet by early 2011 Nokia’s CEO Stephen Elop announced that both Symbian and the MeeGo OS would be replaced with Microsoft’s Windows Phone OS for all Nokia’s smartphones. Mr. Elop had previously been a senior manager with Microsoft where he had headed up their business division with responsibilities for MS Office and other products. Elop was a Canadian and the first non-Finnish CEO Nokia had appointed. He had replaced Kallasvuo in 2010. As a result of his appointment Nokia reduced its expenditure into R&D and focused on providing support to the Microsoft OS.  This also led to Ovi becoming absorbed into the Microsoft Windows Phone Store and Bing became the primary online search engine for all Nokia smartphones. However, these changes were not embraced by the public. In 2012 Nokia’s share price fell by around 14% and its smartphone sales collapsed, despite the fact that they had previously been recovering. From the start of 2011 through to its sale of its mobile phone business to Microsoft in early 2013 Nokia’s market share plummeted. Where it had once been the world’s market leader in mobile phones it was now in 10th place and falling. The alliance with Microsoft was intended to build synergies that would allow the two companies to compete with Google’s Android OS and Apple’s iOS.  Yet the decline of Nokia’s Symbian OS smartphones had taken place so rapidly during 2011 that Apple’s iPhone product had taken over as the market leader. The net impact on Nokia from a financial perspective was significant. Profits fell and the company posted losses of around €368 million in 2011. Throughout 2011–2013 the company continued to shed around 24,000 workers across its global operations.

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When Moody’s downgraded its shares to “junk” status in mid-2012 CEO Elop was forced to admit that the company had failed to foresee the rapid changes that would take place in the mobile phone industry. The new Lumia range of smartphones with the Windows Phone 8 OS was released in 2012 in an attempt to turn around the company’s fortunes, however it was not enough. Nokia’s operating loss for the second quarter 2013 was €115 million and sales were falling. The company had incurred combined operating losses of around €4.1 billion in the previous 2 years.

Exit Nokia These financial and market pressures led Nokia to its final decision to sell out is mobile phone business to Microsoft at a bargain price of $7.2 billion (Kuittinen 2013). The deal saw the transfer of around 32,000 Nokia staff, including Mr. Elop, into Microsoft. Nokia was also bound by a non-compete clause enforceable to 2015. Shortly after joining Nokia 3 years earlier Elop had circulated an internal memo – subsequently leaked – that described the situation at the company as like a person standing on a burning oil platform. His reference to “platform” was interpreted as a reference to the firm’s Symbian operating system or platform. His decision to axe the Symbian OS and replace it with the Microsoft system has been viewed by some as little more than a “Trojan Horse” strategy contrived by Microsoft. Although Nokia’s share price fell by 85% under Elop, he was rumoured to be a favourite for the CEO role at Microsoft to replace Steven Ballmer who announced he was leaving the company in 2014.

References Blank, S., & Dorf, B. (2012). The start-up owner’s manual: The step-by-step guide for building a great company. Pescadero: K&S Ranch Publishing. Cooper, R. G. (2006). Formula for success in new product development. Marketing Management, 15(2), 18–24. Cooper, R. G. (2008). The stage gate idea-to-launch process update, what’s new and NexGen systems. Journal of Product Innovation Management, 25(3), 213–232. Cooper, R.  G. (2017). Idea-to-launch gating systems: Better, faster and more agile. Research Technology Management, 60(1), 48–52. Cooper, R. G. (2019). The drivers of success in new-product development. Industrial Marketing Management, 76(1), 36–47. Cooper, R.  G., Edgett, S.  J., Kleinschmidt, E.  J. (2008). Portfolio management for new product development: Results of an industry practices study. www.stage-gate.com, Product Development Institute. Deschamps, J.-P. (2017). Classic root causes of innovation failures – things we all know but sometimes forget. In N. Pfeffermann & J. Gould (Eds.), Strategy and communication for innovation: Integrative perspectives on innovation in the digital economy (3rd ed., pp.  41–60). Cham: Springer. Kallasvuo, O.-P.. (2008). Nokia annual general meeting. Helsinki Fair Centre, presentation by Nokia CEO Olli-Pekka Kallasvuo, 8 May 2008.

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Koen, P. A., Ajamian, G. M., Boyce, S., Clamen, A., Fisher, E., Fountoulakis, S., Johnson, A., Puri, P., & Seibert, R. (2002). Chapter 1: Fuzzy front end: Effective methods, tools and techniques. In P. Belliveau, A. Griffin, & S. Somermeyer (Eds.), The PDMA tool book 1 for new product development. New York: Wiley. Kuittinen, T. (2013). Nokia sells handset business to Microsoft at a shockingly low price, Forbes 9 February [available online] www.forbes.com Mazzarol, T. (2013). Nokia sells out – case study. Perth: UWA Business School. Nokia (2004). The mobile device market. Nokia Corporation Vision and Strategy, www.nokia.com York, J., & Danes, J. (2014). Customer development, innovation and decision-making biases in the lean start up. Journal of Small Business Strategy, 24(2), 21–39.

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11.1 Learning Objectives After completing this chapter, you should be able to: • • • •

Examine the role of advisory and management boards. Understand the importance of corporate governance. Understand the importance of team building for venture growth. Recognise the different leadership styles required within innovative and entrepreneurial ventures. • Understand the relationship between innovation and culture. • Understand the important of strategic partnering and how to manage strategic alliances. • Understand how to conduct a risk assessment of a venture.

11.2 Chapter Review This chapter provides an overview of some of the elements associated with team building and leadership with entrepreneurial companies. The importance of assembling a well-balanced management team with a complimentary range of skills is highlighted. This management team should be supported by a competent management board made up of individuals who compliment the executive management team and assist in providing strategic guidance. In establishing a board of governance, care should be taken to get a good cross-section of members who can work together, and to avoid individuals who might wish to pursue narrow interests, interfere too much with the operational management, or see board membership as a ‘second job’. © Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_11

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How the company is structured is often critical to success. Entrepreneurial firms should have strong values, a commitment to quality, a willingness to make flexible changes, and strong working relations between employees and the senior management. Team building is crucial to success and should involve understanding the intellectual skills of the team and how to combine these effectively for the benefit of the entire organisation. Successful entrepreneurs hire good people and seek to develop their potential, adapting the organisation’s structure as the business grows. The entrepreneurial manager will need to employ both a transactional leadership style to ensure that projects are completed and quality is maintained, but also a transformational leadership style for innovation and change. Different leadership styles will be required depending on the situation in which the venture and its employees are found. It is also necessary to establish strategic partnerships with leading customers, key suppliers or other third-party organisations. Entrepreneurial managers must learn how to manage strategic alliances and control risk via techniques such as portfolio analysis, AS4360 and technology project risk models. For example, decision tree models can be useful to help guide stage-gate project management and ‘go/kill’ decisions during the NPD and commercialisation process.

11.3 Key Lessons • Venture capitalists want to see a well-balanced team with the right combination of skills that can represent the seven management functions: (i) marketing and sales; (ii) general management; (iii) operations management; (iv) personnel management; (v) research and development; (vi) legal and taxation, and (vii) financial management. • For the smaller firm, it is usually impossible to assemble all these various management competencies in the three to four key people who will comprise the executive management team. It is probably best to focus on the sales and marketing, financial control and operations management areas as a priority. • Fast growth CEOs usually make their decisions with the concurrence of top management teams and consistently utilise their boards in making strategic decisions. They also balance the number of management levels to the number of top managers. Finally, they tend to prioritise developing the functional areas of finance, marketing and operations. • For small firms the challenge is to attract and retain high calibre people when budgets preclude paying high salaries and when the size and market profile of the firm is low and such people are often aware of their talents and selective about the organisations for which they work. • Small firms seeking to attract such high-level people may be able to appeal to them on a different level – such as offering them the opportunity to play the role of mentor. Offering such people equity is another strategy that can be used, although care needs to be taken not to create a confusing share register that might prove detrimental in subsequent capital raising activities

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• Five typical ‘renegade’ types of board member can be identified: 1. Retired and looking for work (e.g. retired former CEO who still hankers after the challenge of running a company, may also slow down the decision making at the board by wanting to discuss issues in depth). 2. The knowledge expert (often a functional specialist such as an accountant or lawyer. They are prone to becoming passionate about areas within their professional field of expertise). 3. The ‘C’ performer (This person is usually poorly prepared for each board meeting and can waste everyone’s time asking basic questions they should have noted in the pre-reading). 4. Special interest flag bearer (This refers to the person who joins a board to follow a personal, political or social agenda. Such individuals may be difficult to deal with as they often have strong political skills and may speak well and enjoy community support). 5. New board member (A newly-appointed member of the board can also become a renegade if they are captured by a factional group within the board in order to secure their vote). • Selection should be based on the ability of board members to provide the company with particular skills or expertise, and not because of mate ship, personal references or personality. • The major traps that teams can fall into are group thinking, poor individual performances and siloing. An impatient senior management looking for fast results can often impact negatively on a team’s performance. Political meddling and the excessive centralisation of power and authority away from the team, denying them sufficient autonomy will also impact negatively. • A transactional leadership style is one in which the manager focuses their team members on the completion of tasks to expected performance levels. Three components of transactional leadership have been identified: (i) contingent reward; (ii) active management-by-exception; and (iii) passive management-by-­ exception. Transactional leadership is important when the tasks are routine and the focus is on the implementation of a plan and/or the maintenance of quality standards. • For change to occur, the manager must display a transformational leadership style in which they lead change. Four key elements that make up the transformational leadership style have been listed (the 4 I’s): (i) idealised influence; (ii) inspiration; (iii) intellectual stimulation; and (iv) individualised consideration. • Situational leadership is a contingency model that recognises the leader exists within a given context or organisational situation: (S1) is a directing style (focus on giving subordinates clear instructions; called telling); (S2) is a coaching style(the leader explains what needs to be done and why; called selling; (S3) is a participation style (share ideas and reach decisions via mutual agreement); (S4) is a delegating style (the leader delegates authority to their team for all decisions). • When a business is small, the entrepreneur can employ a directing style of leadership, however, as the business grows the entrepreneur must learn how to

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t­ransfer knowledge from themselves to their employees. This requires the shift towards a coaching style of leadership. Creating a partnership with another organisation is a complex process in itself. Many partnerships are formed where neither party has any experience in this process, especially on the side of the new venture entrepreneur. There must be a good fit of business strategies of both partners; available resources should complement each other, as an overlap in resources can easily threaten the job security of existing staff and seriously disturb overall staff morale. During partnership formation, partnerships need clearly defined strategic, operational and business goals as well as an accurate mutual understanding of each partner’s strengths and weaknesses. Staff personnel should be briefed as to the history, goals and value of this relationship. The ownership of intellectual property must be clearly defined. Prudence requires that exit strategies be written into partnership agreements. During the ongoing relationship, a partnership is a process and should be managed. Partnering is highly people-oriented. The loss of a key person can be traumatic. Cooperation involves each partner adapting to the other’s operating style. Senior management commitment and the early inclusion of key groups in the planning process can counteract the corporate ‘immune response’. One of the most significant strategic partners for a small, entrepreneurial firm engaged in the commercialisation of innovation is the leading customer or lead user

11.4 Learning Activities 1. Using evidence from your own work experience and environment, identify examples of intelligence (IQ), emotional intelligence (EQ) and implementation intelligence (Imp Q). How well-balanced is your own organisation in relation to these three types of intelligence? 2. Critically assess your own ‘meta-abilities’, writing down what you see as your strengths and weaknesses. How important do you feel such ‘meta-abilities’ are to being a successful manager? 3. Within your group, discuss how each of you might contribute to a well-balanced management team. What areas are your strengths and what are your weaknesses? (Considering both technical skills and ‘meta-abilities’.)

11.5 Creativity Journal Entry For your final journal entry, comment on the following: 1. What have you learnt during the reading of this book, both about yourself and about the nature of entrepreneurship and innovation?

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2. Have any changes occurred since Chap. 1 in terms of your own perceptions of whether you might seek to be more entrepreneurial or innovative?

11.6 Case Study Read the AQ2 Smartaflow case study, which provides an example of a new technology seeking to achieve commercialisation. Once you have read the case and examined it against the contents of chapter 11 and other chapters in the textbook, you should then answer the questions that follow.

Questions/Tasks 1. Examine the organisational structure of AQ2 and try to draw up an organisation chart of the company. Then discuss how leadership is distributed within the business. Is there evidence of a well-balanced team having been created that can commercialise the Smartaflow Chlorisafe technology? 2. What leadership roles do Chris Speight and Steve Brown have within the company, and would their leadership styles need to be different in order to fulfil these roles? Explain with reference to leadership theory. 3. Discuss the way in which AQ2 has used strategic alliances and leading customers in its commercialisation process. What does this case teach you about the role such alliances and lead users play for a small innovator firm? 4. How might AQ2 employ the concepts of risk management outlined in this chapter in their commercialisation of the Smartaflow Chlorisafe technology?

11.7 Case Study: AQ2 Smartaflow By: Jackie Wong AQ2 Pty Ltd. is a young start-up company in Western Australia that manufacturers the ‘Smartaflow’ hypochlorinator, a breakthrough industrial invention for the drinking (potable) water disinfection industry that is suitable for use in small and remote towns with populations of less than 1700. The product comes in three variations – C-type (Chlorisafe), U-type and T-type systems. The systems evolved from a breakthrough pump design that solved the main problems of using aqueous sodium hypochlorite (liquid chlorine) for water treatment. The pump was later combined with other innovative features and developed into an integrated system that significantly resolved safety issues and fulfilled legislative requirements in aspects which traditional water treatment methods had ineffectively addressed. AQ2’s vision is to provide a global market with: A safe, reliable, accurate and low-cost water disinfection system capable of treating all types of water, without gaseous chlorine.

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In 2003, the company secured their own manufacturing facility at Katanning, 295 km south east of Perth, which ensured that the entire system could be developed, fabricated and assembled in regional Western Australia. Its business development office, located in Perth, is responsible for sales and marketing, service and installation functions. AQ2 currently employs eight staff, of whom four work in research, design and product development on a full-time basis. The company is in its early stages of commercialisation, and the majority of the firm’s financial resources have been invested: in mechanical design and development, in protecting its designs in the form of patents and trademarks, and in acquiring and building manufacturing capabilities. AQ2 was incorporated in 2000, and its gross income during the fiscal year 2002– 2003 was expected to be around $700,000. Figure  11.1 illustrates that corporate expenditure on developing the system over the past 3 years amounts to $1.1 million. Future investments in Figure APP.1 were projected on the premise that the company would be able to raise the necessary funds from external equity sources, and subsequently the emphasis of the business would shift dramatically to focus on sales and marketing activities. The four key factors that AQ2 will focus on for its growth are: • market development (direct sales for domestic and licensee acquisitions for export markets); • product improvement (re-design); • product range extension; and • expansion of intellectual property protection.

Fig. 11.1  Funds invested in the Smartaflow system for the last 3 years compared to expenditure in the next 3 years. (Source: Interview with CEO Steve Brown, July 2003)

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It was estimated that an investment of $200,000 would be required to develop each market segment in terms of protecting intellectual property and implementing marketing strategies. Approximately $800,000 would be invested in design-related activities such as product improvement (such as re-design, and the product line extensions), and new product development, with a further $500,000 to be spent on promotional materials (direct mail, website, brochures and printing), and trade advertising. At the time this case study was written, the company had managed to raise $400,000 in funding from local investors, grants and competitions. The initial success of the system can be indicated in its early adoption by local water authorities, and the keen interest shown by those in other Australian states. Enquiries for a series of trials to be arranged in the US, New Zealand and Malaysia have indicated a strong response in potential export markets. The company currently sells directly in domestic markets, and plans to build an international presence by licensing its patented technology, which at this point is complete and proven, with anticipated global sales to reach 3600 Smartaflow systems over the next 5 years at an average sales value of $35,000 per unit. Based on these forecasted sales and a gross margin of 30% or more in licence sales, the company is expecting corporate revenues of $40 to $50 million in the next 5 years.

Going Beyond a Good Idea Chris Speight is the engineering tradesman responsible for the invention of the Smartaflow Chlorisafe system, and now has the role of technical director at AQ2. Chris is regarded as an expert in water disinfection systems for small towns, and has a background specialising in the design, installation and maintenance of water treatment equipment for rural water suppliers for over 25 years. His experience working for the Water Corporation of WA has given him a firm grounding in the technical knowledge of water chemistry, water treatment systems, familiarity with industry standards and legislative trends as well as the manufacture of certain repairable components on the equipment he serviced. The trigger for the invention resulted from Chris’ frustration with the weaknesses of existing pump technology and from operator safety issues dealing with gaseous chlorine. What started out as a part-time research project by a water technician, frustrated with the inadequacies of existing technology and practices, has led to a disinfection system set to transform small and rural town water treatment. The design and development of the Smartaflow pump started in 1999, and the scope of the product concept was later broadened and refined by Chris and a team of specialists and consultants, which subsequently evolved into the unique modular Smartaflow Chlorisafe system. The system is the first commercial product in the world that has managed to solve the problem of sodium hypochlorite causing ‘vapour lock’ – or stalling – in dosing pumps, due to gas bubbles forming during the natural decomposition of the chemical, reducing its effectiveness in reliably disinfecting water supplies. The system also resolves the potential of chemical exposure to the operator, in which the

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patented decanting system ensures the safe transfer of chemicals from all types of dangerous goods vessels. These two major drawbacks of sodium hypochlorite use have led to its low adoption as an alternative to the potentially hazardous and less cost-effective use of chlorine gas in the water treatment industry.

Recognising an Opportunity Over the past century, gaseous chlorine has been the dominant global standard in the water disinfection industry. The chemical is recognised as being hazardous and threatens operator safety, as well as requiring considerable investment for infrastructure and maintenance. Of late, due to increasingly stringent global water regulations with growing demand for better water quality and a push for safer alternatives, it seems that chlorine gas may eventually play a lesser role in disinfection at some point in the future. Chris recognised there was a need for an alternative in the water disinfection market that would overcome the problems of safety and reliability. Sensing an untapped opportunity in sodium hypochlorite, he decided to take on only part-time employment with the Water Corporation in order to work on the project. In 1999 he formed a private service-based company called Aquaclear Engineering, in partnership with his wife Josie. Working independently and armed with personal savings of around $10,000, he began to work on a prototype of the Smartaflow pump, pushed forward by his gut feeling that was supported by positive early results demonstrated by initial tests. While working for himself, he provided services in solving some of the problems faced by the water disinfection industry, which included projects such as the induction of a nationally-recognised chlorine gas safety training course for the Western Australian municipal swimming pool operatives, and was involved in the early development of a portable chlorine analyser that was later approved for monitoring the water supply for Homebush Village during the Sydney Olympics in 2000. In view of these activities and experiences, Chris decided to focus on: Developing an entirely new water disinfection system capable of overcoming inherent problems specific to the strong, decanting and metering of sodium hypochlorite.

The development of the metering pump moved further ahead in 2000, with the approval for funding and support from a Federal Government grant known as the Commercialising Emerging Technologies (COMET) Program. At this stage, the company only had a provisional patent to protect the concept and a basic prototype. Moreover, Chris says that: Despite the inherent risks, the process started and I couldn’t turn back – and something had to be produced.

He described the COMET process as: Excellent in allowing us to really take a look at how we have to do it in bite sized chunks.

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The funding scheme was worth around $52,000 and was managed by private consultants. The program required Chris to go through a challenging course of action that included: • • • • •

conducting market research and analysis, completing a working prototype to prove that the technology would work, finalising the design, developing an intellectual property strategy, and developing a business plan.

As a result, the Submerged Metering and Auto Refill Technology (SMART) system was materialised, designed and engineered specifically for metering sodium hypochlorite. Later that year, the prototype for the chemical decanting system was also designed and produced. Chris knew that, in order for his product to be accepted and thrive in a demanding and conservative market, the invention must present a major leap in product features and benefits in order to be able to challenge the status quo (see Table 11.1). According to Chris, the design and performance of the Smartaflow pump and system is ‘radically different’ from comparable products in the market, and he recalls that: The initial design was developed from a viewpoint that there has to be something better than the existing designs, mainly due to the fact that they don’t meet the needs of the operators  – especially from an occupational safety and health point of view … we primarily focused on best industry practices and considered that a design, quite radical from convention, would encourage the competition to rethink and possibly improve standards in the longer term.

Proving the Technology The identification and involvement of leading customers is important in a firm’s design and product development strategy. With the relatively unknown variables that a new product presents, AQ2 had to convince the lead user of water treatment technology, the Water Corporation, to provide critical trials to qualify their product claims. The Water Corporation of WA manages one of the largest water supply and distribution systems in the world, and has sales of over $1 billion with an asset base of $10 billion. The Water Corporation is also a major user of leading-edge technologies for water treatment and distribution in what is one of the world’s driest regions. In 2001, the Water Corporation ordered a trial unit for field testing and benchmarking. As the company’s first customer, Water Corp helped to identify specific issues concerning the design and configuration of the system for which they provided engineering and technical support for assessing pump performance. These circumstances had forced AQ2 and its staff to elevate their standards in professional conduct and proficiency in dealing with the demands of a large corporation. Since

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Table 11.1  Features and benefits of Smartaflow Chlorisafe Features Automatic vapour release

Accurate dosing Integrated calibration

Automatic decanting

Remote monitoring, logging and control FIFO chemical storage system A simple, powerful control unit

Low voltage Portability Safety Versatility Cost effectiveness Accuracy Reliability

Description Two built-in mechanisms (patented) release vapour while eliminating vapour lock Unlike conventional metering pumps, it is not prone to stalling when using vaporous chemicals like sodium hypochlorite Automatic bypass value (patented) positioning ensures precise dosing under all field and chemical conditions, even at extremely low flows An integrated device allows confirmation of dose rates and calibration checking of ancillary equipment such as residual analysers The operation can be automated Eliminates suction pipes, foot values and hazardous manual operations such as decanting chemical from the delivery container to the local container Protects operator from exposure to hazardous fumes The entire system can be monitored and controlled from anywhere via landline, mobile or internet systems. Has a built in 28-day logger Chemicals are consumed on a first-in, first-out basis Old chemical is not mixed with new and remains undiluted The system is operated by an easy-to-use controller providing manual, flow-paced or set-point modes Workload is automatically transferred between multi-duty and standby pumps Inherently safe, and can use solar or battery power Integrates pump with the chemical container Eliminates manual decanting and exposure to chemicals and low voltage power Can be used on all types of water anywhere Needs only single operator and minimal infrastructure Has zero waste Offers better range of dosing rates (20 times higher than existing pumps) Is 100% reliable with battery backup in case of power failure

then, the system had satisfied the water utility’s high standards and expectations, and the Smartaflow system was now listed in their ‘blue book’ of approved products. The final report from the Water Corporation concluded that: The unique and innovative design of the Smartaflow pump has been successful in addressing a number of issues relating to the dosing of sodium hypochlorite, i.e. vapour locking and manual handling of the chemical. On top of this, the pump has been designed such that it could be marketed as a ‘total package’ solution for small chemical dosing facilities because the unit can be mounted directly onto the outlet nozzle of the storage container.

The Water Corporation had in total purchased and field tested an additional five units of the system for different applications, proving the versatility of the system, at an estimated cost of $55,000 per unit. It had also taken a role in sharing 10% of

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the costs of the intellectual property licence. AQ2 then identified at least another dozen or more potential rural districts around the state that would require the Smartaflow system. As yet, there were more than 200 water distribution systems in WA serving populations of less than 1700 – of which many were not compliant with the stringent Australian water guidelines introduced in 1996. It was anticipated that the system would be considered as a central technology when the Water Corporation decides to roll out its plans to improve these sites in the future.

Protecting and Leveraging Intellectual Property For a start-up company with a radically different innovative product, the key challenge is to steer the business through growth by expanding sales worldwide through licensing and planning for new product development. The Smartaflow pump was a major departure from other products in the market, and it was important in AQ2’s commercialisation strategy that such a technology had to be rapidly developed and protected in an uncertain market. Protecting intellectual property (IP) allows the company to have temporary commercial control of its product’s unique features, which excludes others from replicating and exploiting the design of the invention for the life of the patent. To do so, the company had to build sustainable competitive advantage by building a portfolio of IP assets around its patented core technology. Much of the firm’s competitive advantage lay in its ability to effectively leverage the value in existing IP, and its commitment to continuous innovation in design and product development to sustain their IP strategy. The company’s business plan put forth the view that: A key value-adding step in the manufacturing process is the manufacture and assembly of our patented designs.

A provisional patent was registered with IP Australia in 2000 for the breakthrough chemical metering Smartaflow pump that forms the ‘heart’ of the Chlorisafe system. In 2001, the patent was upgraded and broadened to encompass the final product specifications (pump, decant system and dosing spear), and the additional patents were lodged under an international patent application. Thus, the four patents surrounding the pump form the cornerstone of the company’s IP and technology strategy. The trademarks of Smartaflow® and Chlorisafe® have also been registered in Australia with an overseas listing pending. The IP license is co-owned by Chris and the Water Corporation, in which AQ2 believes that by having the large corporation’s ‘weight behind the patent, will be a commercial advantage and help deter imitators.’ A total of $200,000 had already been invested in the patent process and IP rights proceedings, which included legal consultations and applications for patents and trademarks. It was projected in the firm’s business plan that a further $650,000 would be allocated for protecting its existing patented designs in the coming 5 years. According to Chris:

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The patent process is like a baby; you have to feed it all the time – the expected length of time is likely to be 20 years … and the design is constantly challenged by others that claim that their products are similar.

Chris recalls that it was a ‘big’ learning curve for him, but he never anticipated it to be such ‘a long drawn out process’. He says that gaining access to the internet and the relevant information has been instrumental during the initial periods, and admits that it would have been impossible to accomplish the feat without the strategic foresight of management and the expertise of staff and external consultants.

The Outcomes Through comprehensive field-trials and testing by lead users in the industry, the pump technology has convincingly dissolved the barriers to sodium hypochlorite use, and has managed to guarantee 100% reliability in delivering accurate doses into drinking water supplies, even at low flows – which makes it an ideal disinfection system for small remote towns with varying levels of water needs. AQ2 has also combined other innovative features into a simply and economical modular system that costs less than a third of an equivalent gaseous system to install. This makes it an attractive alternative to the existing technologies. The Smartaflow pump currently generates the highest margins from the sale of a system. The four patented design features in the pump has allowed the potential of the core technology to be extended into diverse applications, which may include: other water markets, broader chemical dosing markets, and the development of complementary products. Steve Brown, who joined AQ2 as its CEO in 2001, acknowledges that to a significant degree it is ‘the cocktail of elements’, such as the system’s patented design and providing the customer with a holistic product solution, which has enabled AQ2 to charge a premium price in the market. He says: The system is essentially two inventions into one, which is more valuable than each on their own, and as a whole is greater than the sum of its parts. The system’s patented technology helps to prove that there is nothing similar to it; therefore, the client has the confidence to purchase directly from AQ2. The procurement process, e.g. tendering, is no longer necessary as there isn’t any other product that can perform a similar function on the market.

The Smartaflow system won three industry awards in 2002, which have generated significant publicity in the media and interest from investors in the business community. The Western Australian State Award in the Telstra Yellow Pages Business Ideas Grants competition was a valuable award that included a cash prize, business mentoring, advertising and television exposure on the Channel 9 ‘Small Business Show’. Later that year, Smartaflow won the WA Water Industry Awards, which encompassed both the ‘Overall Minister’s Award for Excellence’ and the ‘Award for Water Treatment and Recycling’. The system was claimed to be a ‘genuine innovative breakthrough’ by the awards judges.

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The Role of Design in Commercialisation AQ2 believes that design and innovation go hand in hand. Good design is viewed as being inextricably linked to the firm’s commercialisation strategy for its new products. The management team believe in taking a systematic approach to market research in and giving strategic attention to marketing and sales. As CEO, Steve is responsible for the implementation of the business plan and marketing and sales strategies as well as the company’s human resource management. To this mix of competencies, he also adds design skills: Innovative design is absolutely crucial to the business; there couldn’t be a business at all without it…Chris has been through the conceptual and theoretical phases and the product has gone through a developmental process so that it is manufacturable, and that has probably been the turning point for the business.

When asked if design played a central role in the successful of the pump’s commercialisation, Chris says: Whilst I am not quite sure that design is the primary element, it certainly has to be a key element in the continual improvement of an engineering product  – be it conceptual or existing.

Through his past experience with corporate designers, Chris has noticed that that most of them were ‘arrogant’ and not user-centric. He felt that they were irresponsible by not meeting user needs and expectations, and often refused to ‘look outside the box’. He says that design should be focused on functionality and commercial relevance, and believes a product must also be marketable and profitable for the business in the long run. As he says: The product must result in a commercially viable blueprint – a saleable item of some worth … Like it or not, though, to feed the team and pay the banker, the design has to sell. Commercial reality bites!

Steve, who has had extensive experience in growing start-up businesses, says that he became interested in AQ2 because Chris had a business with the elements he was looking for, in terms of a truly innovative product that had protected IP and the opportunity to grow and become ‘big and interesting’. When comparing Chris with other innovators he had met, Steve commented: Innovators cannot often differentiate between a good invention and a good business. They automatically assume that a good invention is useful, and that because it is useful it can naturally be built into a business. This is not necessarily the case, because an invention may only obtain a small margin per unit, and therefore to build a business out of it, one may have to sell millions of units and spent a lot of capital to promote the product far and wide. By concentrating on branding and design, for example, one can help a business to earn a relatively high margin on a product.

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According to Steve AQ2 has now: Developed a clearly defined product, assembled a credible management team and professional board, protected its intellectual property and has the potential to make a profit.

The modular design of the integrated system was a strategic decision made by management when planning for product development. This has allowed AQ2 to derive its primary revenue from system sales and support contracts where value-­ adding and profitability is maximised. From early on, the company realised that they were not just selling a stand-alone product or a single innovative component, but an integrated system and complete solution that could be sold at a premium. According to Chris: Due to the manner in which we have chosen to enter the market, the pump, the heart of the ‘system’, happens to be packaged as an integrated component of a metering pump system; we have not just targeting the cut-throat stand-alone metering pump market.

The flexible design of the system also allows it to be easily adapted to the increasingly stringent international standards of demanding water supplier requirements. Within its domestic market, instead of charging for a $2000 pump, AQ2 was selling the system for between $50,000 and $60,000 per unit, with an average profit margin of around 40%. According to Steve: The Water Corporation generally looks out for turnkey products, where the supplier would provide the system, leave it at the site and all they need to do is switch it on and it is ready to run. The alternative to that would be to buy all the components separately, where they would go to a supplier to buy two pumps, a decanter, a control panel and a cabinet to put the system in, and then later assemble the system themselves, which is unlikely as their resources are limited.

Beyond functionality and ergonomics, Chris says that design can also play an important part as a marketing tool, where the product has to look and feel right. Although large corporate buyers like the Water Corporation are relatively price sensitive, both Chris and Steve understand that design can be used as a key positioning tool, where the customer’s perception of value can be shaped by it. Steve makes it a point to instil the importance of ‘looking the part’ to his employees, where he sees it as a significant part of the selling-in of a high-quality technological product that commands a fairly high price. In view of this, he says: If you want to look like a big company, one must start behaving like a big company…and appearing excellent is something big companies try to do right and small companies need to do in order to get the confidence of customers who demand quality. This is because the better a product looks, the more it helps customers feel good about paying significant money for it. It all comes down to getting all the details right, from the product, to the logo, and onwards to printed material. These aspects have to improve and continue to improve as the business grows. (Fig. 11.2)

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Fig. 11.2  The unique integrated and modular Smartaflow Chlorisafe system and Smartaflow pump

The Organisation of Design and Product Development Chris’ role as technical director is to provide the company with an innovation strategy and providing the overall vision and momentum for the product development process as well as to generate sales. With top management support, the design and product development activities are integrated into marketing and sales, financial and administrative functions so that the product potential can be maximised. Chris says that access to good people has been important, and they have provided the ‘main energy’ for the successful development and commercialisation of the pump and system. Through experience, Chris has observed that the process of design and re-design requires a multi-disciplinary group of people with personalities that can allow and accept criticism; moreover, it is critical to find ways to ‘dovetail’ the intellects and skills of both internal and external expertise to support the design, visualisation, prototyping and production of the Smartaflow project. Chris admits that he has a creative streak tempered with an understanding of practical realities, and has been fortuitous in finding the right kind of people with the necessary skills at critical points of the product development process. To a significant degree, the key to finding appropriate support was an ability to recognise his limitations and to nurture effective collaborative relationships to supplement them. On reflection he acknowledges that: A continuing process of improvement for any engineering design is costly and, unlike an artist who merely relies on his own ability to produce a successful work of art, an individual innovative engineer can seldom produce his masterpiece without a dependence on the ingenuity of others.

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Planning for Product Development According to AQ2’s business plan, product development is projected 1–4  years ahead, and articulates explicitly what the company intends to develop in terms of products and markets. Product development expenditure is expected to be around $280,000 for the next 2 years. It is important for the future growth of the company that the patented core technology is flexible enough for them to develop complementary products in order to expand into other market segments with a sustainable competitive advantage. Besides planning for growth, the company is consciously aware of its weaknesses and strengths in terms of resources and competencies that would allow it to realistically face the risks of diversification in order to enter new markets. Its knowledge of where the firm and its products are positioned in relation to competitors has assisted in making decisions and trade-offs to extend its product range, through either choosing to redesign and ‘stretch’ existing products or to introduce new innovations. The company plans to establish two distinct business divisions, with one unit focusing on manufacturing and developing products while the other concentrates on market development activities. The Chlorisafe system is fully developed with all design, drawings and specifications complete. By having a proven system in place, it is presently implementing preliminary plans to roll out its sales and marketing strategy in a systematic and targeted manner. With interest established in export markets, the company is planning a licensed distribution model as it ensures more rapid penetration. Extensive market studies have revealed significant long-term trends in the water disinfection marketplace that will influence the uptake of the company’s innovative technology. As a user-oriented approach is central to its design and product development philosophy, their research shows that water suppliers are increasingly concerned about issues which the Smartaflow system can effectively manage, such as their exposure and accountability as privatised companies in the areas of: • the risks of over- or under-dosing of chemicals, • the safety of local populations and the environment, and • operator safety. To address customer requirements, the robust design of the Smartaflow system has permitted it to be potentially developed in a number of ways that may include altering the dimensions of the system or the type of chemical metered. Chris and the development team are currently planning to extend their product line for applications beyond the water disinfection market, where future developments may include applications: in agriculture, in mining, in domestic or industrial grey water systems, and in commercial and public swimming pools.

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The Evolution of a New Product Development Process The company’s core development team is responsible for design, development, manufacturing, testing, installation and service. The team includes Chris as the technical director, Jeremy George as design technician, Gary Smith as electronics design technician, and Gary Richardson as production specialist. The team are all full-time staff based in the company’s Katanning manufacturing site under the guidance of Chris. Chris believes that the design and product development process requires foresight and planning, getting the details right and challenging perceptions as well as the effective coordination of internal and external design and development teams. He emphasises that it is important for them to begin by looking at the ‘big picture’ or concept, and then proceed to discussions with a set of rough sketches on a whiteboard where everyone is involved. Dialogue based on the sketches and suggestions for the refinement of concepts are important to align ideas. Chris calls this the ‘affinity process’, saying that this phase synchronises and clarifies the thought processes of the team. The second stage usually leads to a prototype being fabricated – where at least three working prototypes are tested before commercialisation. Archiving sketches, drawings and documents is essential for them to keep track of what has already been done, especially for problems that have been solved before, thus saving time. It also serves as a reference to keep track of the development process. According to Chris, computer-aided drawings (CAD) used to be considered a luxury, but they realised that detailed drawings could be used to sell ideas, to generate a routine within the development process, to assist in the patenting process, and to act as a communication tool for manufacture. The team members are all focused on what they do well, but Chris claims that they are ‘a bit like artists’, temperamental and usually difficult in business matters. He comments: There is a fine line when keeping people interested and focused on the horizon when it is time for commercialisation … as the situation demands a great deal of dedication and commitment to working nights and weekends. The irony is that too often those involved with the creation of the masterpiece seldom care for the structure – and even less for commerciality – and, regardless of its brilliance, a design without a definitive conclusion will never become a blueprint of any worth. But for us a successful design did emerge. The first of many ‘valuable’ blueprints was born from a team effort.

Chris says that development and team practices have been managed informally over the years, improvising and refining processes as they went along. It seems to him that the challenge for AQ2 in the future is to motivate and get buy-in from the team when changes in the process are required as the company grows. In the future, it is suggested that installation and servicing will be outsourced to allow the team to focus exclusively on design, product development and manufacturing.

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The Use of External Design Services Chris says that the realities of commercialisation required the discipline and skills of specialists who were trained to make things look ‘professional’ and ‘businesslike’. After careful thought and research, he realised that professional engineering designers were required to put together a product that was ready for the market. Chris is well-known for bringing together a menagerie of skilled trades’ people and designers who have assisted him in developing the Smartaflow pump and system. He observes that engineering designers, who are essentially creative personalities, were not easy to get along with, and for the relationship to work he had to look beyond personal characteristics and concentrate on skills and talent. Chris realised from the beginning that good engineering designers were not cheap, but acknowledges that ‘they are worth their weight in gold when it comes to results’. After some research, he found that access to the expertise he needed was non-­ existent in Katanning. Chris chanced upon meeting Dianne Boddy when he happened to be involved in a group project with students from the Graduate School of Management at the University of Western Australia who knew of Dianne’s reputation and expertise as a leading mechanical engineering designer in her field. Convincing her to work on the pump design with him was not an easy task, as she was very selective with the projects, she was willing to work on. The primary function of Dianne was to create engineering drawings for the purpose of manufacturing prototype products. At first, Chris found it difficult to cross the cultural divide between manufacturer and designer, but both recognised that they had to work together to achieve a satisfactory end-result. Their intense and long-term interaction helped to resolve the conflict that arose between them from time to time. Friction aside, and more importantly to Chris, was the fact that Dianne was sympathetic to inventors like himself. One of the key lessons learnt from this process, and one that fascinated Chris, was that Dianne treated the exterior of the product ‘like a piece of furniture’. In his view she had the ability to focus on the proportions and aesthetics from an engineering perspective that ultimately contributed to a product that was designed to be functional and yet aesthetically satisfying. Prior to his experience with Dianne, Chris was primarily focused on achieving technical precision and resolving the functional aspects of the product and never really appreciated the role proportions played. He comments that, … Dianne had the perfect eye for it … the final product looks and feels like a well-­ engineered product.

Like Dianne, David Miller was also a highly-qualified Perth-based mechanical engineer with excellent practical skills and credentials. David had a mechanical engineering background and experience working with other designers and start-up companies. He specialised in product development that involved concept development, research and development, prototyping and testing to design for volume

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production. Chris says that, unlike Dianne, David appears to be more entrepreneurial in approach, as he has recruited a team of other specialists to support him. Over time, besides providing expert drafting skills, David became a rich resource in terms of knowledge and networks, assisting Chris immensely by ‘sending him in the right direction’. David’s library of catalogues, research expertise and countless referrals saved Chris time, effort and costs in sourcing parts and other manufacturing components many times over. Over their period of close interaction, David continually proved to be proactive in putting forth suggestions for improvement and in imparting advice that often went beyond his brief.

Strategic Partnering: Baker’s Junction Machinery In 2002, Baker’s Junction Machinery (BJM) in Albany was contracted to manufacture the initial complete models of the Smartaflow system. Gus Hook, its owner and proprietor hired Gary Richardson, who at that time was not employed by AQ2, to specifically manage and work exclusively on the Smartaflow account. Before AQ2 built its own manufacturing plant they leased workspace from BJM and purchased equipment to facilitate this working relationship. The purpose of this investment was to decrease the risk of BJM taking on the manufacturing of an unproven product. Both Gus and Gary have extensive experience with complex and sophisticated engineering projects, and they believe that the intense period of planning and design iterations before manufacture saves time and costs in the long-run, and that problem-­ solving with the client to make continual improvements during the initial phases provides access to better design and lower production costs. Starting with drawings from AQ2, BJM designed and manufactured specialised tooling (around 60 different parts) for the system. These custom-made tools have decreased the average time of manufacture from 8 to 4 h. Whilst Chris is often more focused on the end product, Gary says he continuously examines how the design can be easily be adaptable to other products that would be extensions of the existing range, as well as getting the models to become rational versions for production. It is also his role to remove superfluous features not contributing to the functionality of the final product. Chris says that the synergies built up over time with BJM contributed to the ‘closeness, seamlessness and enthusiasm that is evident with their long-term involvement’. Separated by distance, they communicated through email, sending CAD drawings over the internet for approval, while the usage of synchronised software made processes more compatible and efficient. The nature of the relationship allowed AQ2’s technical team to be open to suggestions from Gary, as they constantly discussed and exchanged ideas and built up a routine over time. The ease and effectiveness of communicating also helped strengthen the bond between like-­ minded individuals and AQ2 has benefited from this interaction with BJM as it has led to the standardisation of key production processes.

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Chris’ criteria for selecting designers to work with is based on: a good track record, their ability to work with individual inventors to a satisfactory conclusion, their ability to provide practical solutions, and the degree to which they can fill in knowledge and skill gaps when required. Chris had this to say about his experiences with designers so far: Most importantly they were sympathetic to individual inventors (as opposed to companies). Furthermore, they gave me access to a network of specialist services (Perth and elsewhere) – especially in the case of David. In reality, finding them was not easy as they were selective in which clients they took on, and generally had little interest in taking on new projects (referring to himself) – especially crack pot individuals with a hair brain idea.

Over time, AQ2 has developed a design and technical team by recruiting specialists internally to form a multidisciplinary team environment. As a consequence, they now use external designers less frequently for ongoing projects. An important insight, through working with professional designers, has revealed to Chris the importance of thinking about the manufacturing process at the design stage – as it ultimately saves time and decreases complexity and costs during production. Chris not only learnt how to facilitate an outcome with different personalities and ideas, he also discovered that a systematic iteration of ideas – by going back and forth and exploring options from different perspectives and being challenged in the process – makes designing and product development a synergistic process that can involve everyone from senior management to staff as well as external specialists. He remarks that the transfer of knowledge and skills from their engagement with external designers was a critical change agent in contributing to the continuous refinement of their internal design and product development processes. The learning effects have filtered through to the rest of the in-house product development team and, subsequently, the standards and attitudes towards product development processes have been raised. For example, Jeremy George was a carpet layer by trade, and his initial exposure to working with a Dianne Boddy inspired him to pursue his CAD skills. With sheer determination, he drove to Perth for 16 weeks to complete a TAFE course to learn a two-dimensional drawing program. Through his new knowledge and acquired skills, he subsequently developed the three-dimensional plans that are used for manufacturing the Smartaflow pump. The detailed CAD drawings and research by Jeremy also helped with the patent application. Chris says: ‘It has taken Jeremy around three years to get his drawing ability to today’s level, and his skills are an unexpected bonus from what he was originally employed for.’ In the beginning Chris set out to be a key instigator in the process, and it has surprised him that others have also evolved throughout the experience. He can now confidently leave his staff to go through the product development process without his constant supervision. His current role is to manage and facilitate the development process by bringing a diverse group of people together that have the right attitude and expertise to do the job.

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Outsourcing Graphic Design Services Steve says that, in the beginning, he had to design the Smartaflow brand and website, as they were on a tight budget. His insights into branding and graphic design stems from his experience with marketing, public relations and advertising professionals during his previous ventures in technology and start-up companies. He realises that, if they aim to pursue international markets, the upgrading of their brand, the website and their printed material will be central to producing a desired image in each targeted segment. For example, if entering the US, a separate web portal may have to be designed and maintained, and any promotional materials  – e.g. product brochures – would have to be reprinted in imperial rather than metric units. In 2002, AQ2 contracted the services of a marketing professional, who started by managing public relations work with the company. Maureen Mawson has expertise in marketing and communications, media liaison and event management. She is also charged with the management of AQ2’s design needs in terms of sourcing for graphic designers and printing. Although Maureen has no formal background in graphic design, she credits her design philosophy of ‘less is more’ to her employer in London, who taught her about keeping designs simple where it ‘does not have to be overdone to drive home the message’. Maureen’s second project involved a product brochure. At that time the company only had the Smartaflow brand, and the previous design of a brochure by another agency was, in Maureen’s opinion: ‘… a little old-fashioned and not contemporary enough to reflect a new technological innovation. They (AQ2) needed something to show off an exciting product.’ She concurs with Steve and Chris’ point of view that: ‘if a product wants to look like it is worth $50,000, both the company and its products will have to look the goods, as the intangible aspects are also important to differentiate them to the customer.’ Maureen essentially manages the design process by briefing and liaising with a freelance graphic designer on a project’s requirements. She sees the benefits of going to a professional designer as an outsourced advantage in order for the business to focus on more value adding activities, and comments that: A designer is trained to do the job, and to do things that you can’t do as well. Steve or myself could do the design work, but it is worth paying the extra money to get a better product. It all comes down to the results you get from an effective piece of work. It is a good return on investment where it is the best use of one’s money and time. As AQ2’s business grows, Steve would need to focus on different things.

Although finances are tight for a new company such as AQ2, Steve would typically provide Maureen with a budget and an idea of what he wanted. Frequent informal discussions are held with him on how they should apply the branding, and how they could extend it to other items such as newsletters, direct mail and trade show displays. Maureen realises that everything she does will be built upon an evolving model as the business grows, and she is motivated by the fact that the process is

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inclusive, e.g. they are often brainstorming and evaluating possible markets, other applications for the product, and industry trends. During these meetings, Maureen usually records an action list and then monitors tasks as they are implemented. Maureen believes that the marketing function should be in direct contact with senior management and should be incorporated into everything an organisation does, as this helps a company convey a consistent message. Maureen remarks how this situation is reflected in an exemplary way in AQ2, where Steve and Chris are both openly communicative and supportive of the process. Over the past year, Maureen has been treated as an integral part of the AQ2 team and is now familiar with the company’s long-term goals and branding objectives. Their continuing synergistic relationship has stretched her role into the strategic planning and implementation of AQ2’s marketing needs while working closely with management and staff. Maureen adds: The beauty of small businesses is that they can work in a non-hierarchical environment, getting support from the top, and working closely with senior management and staff from different disciplines.

Work Book: Financing the Venture

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12.1 Learning Objectives After completing this chapter, you should be able to: • • • •

Understand how new ventures are financed. Understand how to position new ventures for appropriate funding. Appreciate global funding networks and venture capital. Understand the role of venture capital in innovation and commercialisation. • Understand the ‘financing gap’ problem of entrepreneurial financing.

12.2 Chapter Review This chapter has provided an overview of the financing process for entrepreneurial firms. For these types of businesses, there is likely to be an equity finance gap due to a lack of available risk capital. Sources of financing can include banks, financing firms, insurance companies and trade creditors that provide debt financing against either tangible assets or cash flow. One of the most common sources of financing is bootstrapping, or the funding of growth via retained profits and cash flow. A critical issue for entrepreneurs is to ensure that they have sufficient working capital (e.g. liquid assets and cash) within the business to fund daily operations and growth. Debt financing is typically obtained from banks while equity financing is secured from investors who can be either private, informal sources such as family and friends, or business angels (high net worth individuals willing to invest in a small firm). Bootstrapping offers lower risk and greater control than debt financing, and does not dilute equity – as is the case with equity financing. Entrepreneurs seeking to fund using bootstrapping need © Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_12

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to understand the difference between cash and profit. A business might be profitable, but if it cannot access good cash flow it might still face financial ruin. Debt financing can be short-, medium- or long-term in nature, and usually requires the borrower to show a good trading history, strong cash flows, and the ability to underwrite any borrowings against collateral such as property or fixed assets. Banks are competitive and borrowers should shop around but should also cultivate a good working relationship with their banker before they need to raise money. Entrepreneurs seeking to raised venture capital need to prepare a sound business case and be willing to surrender equity and control over their business in order to secure faster growth. Equity financing is not usually available to entrepreneurs unless they have a strong technology base or the ability to grow rapidly. A venture financier takes equity in the business with the expectation of a high rate of return. Venture capital moves through a series of distinct stages, usually with higher levels of actual funding but lower levels of risk and return. A major problem facing small, entrepreneurial firms is a lack of early-stage seed capital investment. This is typically available only from informal sources such as family and friends, or perhaps business angel investors. Venture capital remains highly important to economic growth.

12.3 Key Lessons • Access to financing is one of the most significant challenges facing entrepreneurs. There is a financing gap that exists within most economies whereby banks and suppliers of venture capital essentially ration credit and deny funding to entrepreneurial ventures, particularly start-ups and small firms. • Entrepreneurial capital, for the formation of new business ventures, is usually available from at least three sources: 1. Bootstrap financing: the funding provided from the entrepreneur’s savings and what can be retained through cash flow management and retained profits. 2. Debt financing: the funding borrowed over the short and long-term from banks, other financial institutions and credit cards. 3. Equity financing: the funding obtained from informal and formal investors who take part ownership in the business for a return on capital. • Compared to large firms, most SMEs rely more heavily on bootstrap financing in the form of personal savings and retained profits. As a general rule, SMEs retain a higher proportion of earnings, which they use as working capital and to fund future growth. 1. The important benefit of bootstrap financing is that it costs little or nothing. Further, the owner-manager can have total control over the funds and their use.

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2. A common cause of small business failure in the initial years after start-up is a lack of working capital. The cash flow cycle needs to be carefully managed, particularly where the business is growing, because this will place more demand on working capital. 3. The firm’s break-even also needs to be closely monitored. Break-even is where the total costs are equal to the total revenues. The main characteristic of debt financing is that it is money obtained from a lender at a cost, usually associated with an interest charge on the repayments. Debt financing requires the entrepreneur to guarantee the debt and thereby risk the potential loss of not just the borrowed amount but also of their assets (e.g. home). However, debt financing has several benefits when compared to equity financing: lower cost of capital, greater borrowing ability, no loss of equity or profits; and no loss of control. 1. The final cost of borrowing money often involves much more than just the interest rate. The checklist for reviewing the costs of a bank loan should include direct financial costs, indirect costs and loan conditions and personal guarantees needed to obtain the loan. 2. A major cause of failure in bank loan applications by small firms is the existence of information asymmetries, where the information available to owner-­ manager and banker are not identical. Unlike venture capital, the banker is not seeking to achieve rapid return on investment and an early exit strategy. Most banks want clients and are generally highly risk adverse by nature 3. A new emerging source of debt financing is peer-to-peer (P2P) lending. This is currently still in an early stage of development, but has been growing strongly in recent years. SMEs also don’t generally seek equity financing. This is due in part to the cost and difficulty of securing equity financing for a small firm, but also the desire by many entrepreneurs and small business owners to retain control over their venture and to not dilute equity control. The financing lifecycle through which small firms typically pass if they follow a VC-funded growth path consists in several distinct stages that the firm must pass, commencing with early stage seed capital funding, then moving on to early stage and later stage VC funding until it is either sold to a larger organisation via a trade sale or listed on the stock exchange via an initial public offering (IPO). A study of venture capital investors found that the top five things that they looked for when deciding whether or not to invest in a deal were: the entrepreneur’s personality, the entrepreneur’s experience, characteristics of the product or service, characteristics of the market, financial considerations. In order to do a deal over securing finance, the entrepreneur needs to understand three key things: (i) they must understand their business; (ii) they must understand the viewpoint of the venture financier; and (iii) they must understand what their own needs are in relation to the money being sought.

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12.4 Learning Activities 1. What are the pros and cons of debt financing and venture capital, and why would some entrepreneurs feel that venture capital should not be sought unless there is no other alternative? 2. For many entrepreneurs the venture capital sector is seen as difficult and fickle, but the venture capitalist usually feels that the problem is due to the entrepreneur not being ‘investment ready’. What is required for an entrepreneur to get their business ready for venture capital investment?

12.5 Creativity Journal Entry For your fourth journal entry, address the following: • Have you tried to get a venture (of any sort) funded or backed? If you have not, would you now? • Describe and explain the venture and related funding you chose or would choose to pursue. • What kinds of issues might you encounter in an entrepreneurial fund-raising process? • How important is implementation versus planning? • Are there any specific issues – i.e. benefits or problems – that may arise from your location?

12.6 Case Study Analysis Read the Mt Romance case study, which provides an example of venture capital financing of an entrepreneurial growth firm and the relationship that must develop between the entrepreneur and the venture capital financier in order to make the deal work. Once you have read the case you should then answer the questions below.

Questions/Tasks 1. What were the key characteristics that venture capital looked for in the Mt. Romance deal? 2. Why was the relationship between Steve Birkbeck and Ian Murchison important to the way this deal was managed? 3. What were the impacts that securing venture financing had upon Steve and Karen Birkbeck, and how did they handle these? 4. Assess the positives and negatives of the venture financing to Mt. Romance. On balance was it a good thing?

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5. If you were asked to provide advice to an entrepreneur about the key things that they should consider when seeking to raise venture financing for their own business, what lessons would you deliver using the Mt. Romance case as a guide?

12.7 Case Study: Mt. Romance Australia Ltd By: Jackie Wong Mt. Romance Australia and its founders, Steve and Karen Birkbeck, have come a long way since they set out in the 1980s to manufacture emu oil based therapeutic products in their kitchen. Today, far flung from its humble beginnings, the company operates the largest sandalwood production factory in the world from the town of Albany, a rural centre located in the south west of Western Australia. Since the company began sandalwood oil production in 1997, it has become a major supplier of sandalwood oil, which is derived from an indigenous Western Australian species known as santalum spicatum. Western Australia is host to the world’s largest sustainable reserves of sandalwood. It is a little-known fact that during the 1800s, sandalwood was Western Australia’s most valuable export to the Far East through the port of Albany, which makes it an even more venerable industry than the state’s highly celebrated gold mining industry. In the past, sandalwood oil had been prized for its aromatic, therapeutic and mystical properties. However, in recent times, its value resides in its properties as a perfume fixative, which represents a lucrative market in the fine fragrances industry. Although yield of the active ingredient (santalol) in the West Australian variety is lower than the East Indian sandalwood species of santalum album, poor agricultural management practices in India have resulted in dwindling supply of the Indian product, increasing the demand for high quality Australian sandalwood oil. Mt. Romance has added value to a scarce resource and has been instrumental in revitalising the sandalwood industry by: • using cutting-edge research and development to discover and commercially develop the natural ingredients found in Australian flora, • securing market leadership, • controlling supply, • promoting sustainable agricultural practices, and • pursuing innovation in export, retail and tourism. The successful sourcing of venture capital from Foundation Capital and other sources of private equity, together with the development of world-class manufacturing technology, has allowed Mt. Romance to strengthen its position as a high-tech, export-oriented regional enterprise. During the 1990s, the company was able to obtain financing from a variety of channels such as overseas investors, local business angels, banks and venture capitalists. After repaying their French investors through loans over a 3-month period in late

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1996, they acquired an essential oils complex in Albany in 1997 to produce sandalwood oil. The substance was identified by the Birkbecks through rigorous research and assessment as a sustainable and competitive resource that would provide them with a long-term global advantage. By the end of 1997, they had an injection of funds from a local business angel for $1.3m. They used this initial boost in financial support to extend the manufacturing complex by adding an international showroom and retail shop, which was set up as a strategic vehicle to develop a home market for a range of Mt. Romance consumer products. The trading profits from the consumer products and bulk oil division were then reinvested into the company for research and development. Further funds totalling $1m were raised from European industry players in 1998. The only institutionally invested venture capital fund in Western Australia, Foundation Capital, then provided another $2m in 1999.

The Beginning of a Relationship Foundation Capital was established in 1994 to invest long-term equity capital in Australian small- to medium-sized enterprises with strong growth potential, adding value by being an active partner in guiding and supporting these companies through critical strategic and management issues. Foundation currently manages $113.8m across three funds, and invests between $1m and $10m in enterprises from early stage to pre-IPO. The relationship between Mt. Romance and Foundation Capital began rather serendipitously when Foundation Capital’s founder, Ian Murchison, and his wife were holidaying in Albany in mid-1998. At that time Foundation Capital was actively seeking an investment opportunity in regional Western Australia in sectors that they considered to be prospective such as mining, agriculture and manufacturing. After completing a tour of the Mt. Romance sandalwood complex, Ian was impressed by its set-up and preceded to contact Steve Birkbeck to arrange a meeting. Ian was enticed by the story of sandalwood and the opportunities it represented. Ian also found that not only did Steve have the enthusiasm and a strong marketing background, he also possessed the elusive ‘X factor’. This sought-after quality, as Ian explains, is the characteristic of an experienced and driven entrepreneur who is a non-autocratic leader able to establish a good team behind him or her. It is also someone who is committed to the delivery of results. From Steve’s perspective, it was Mt. Romance’s requirement for a large injection of capital to prime it to reach new markets that was the trigger for needing venture capital. In 1998, Foundation Capital was still an embryonic venture capital fund, so Steve had to confirm, through his business and personal networks, its track record and reputation before a formal engagement. He discovered that Foundation had extensive experience from other venture funds in the US that have spanned 20–30  years, and that Ian was a respected player and ‘seasoned warrior’ in the industry. The two companies came together with the mutual objective of building a profitable company and maximising the return on shareholder investment. Although

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Foundation Capital was a quality investor, Steve did not have any real idea at that point in time what the outcomes of the relationship would be. When Foundation Capital was negotiating with Mt. Romance, Mt. Romance was close to finalising a contract with the Western Australian Government Department of Conservation and Land Management (CALM) to process sandalwood for a period of 10 years. Steve says that Foundation Capital’s influence was significant in recognising that Mt. Romance had to focus on the bulk oil business, and that it had to be a major supplier of sandalwood oil to be a formidable competitor in an industry traditionally dominated by Asian players. They had to embark on a very ambitious financing arrangement and, partly as a result of Foundation Capital’s expertise and resources, they managed to finalise a significant contract with CALM, securing the supply of sandalwood for oil production. They bought a huge quantity of sandalwood in order to control supply, with the intention of reducing competition and becoming the dominant supplier.

Structure and Process of the Investment Steve and Karen Birkbeck have always been hands-on business owners, although Karen has had less involvement recently, partly due to a condition of the venture capital investment that is designed to reduce founder influence at the board level by limiting the number of family members that can be directors. Steve admits that this scenario often happens when one relinquishes ownership rights and brings on external shareholders. The company’s board was structured to challenge the CEO by reducing Steve’s control base. Suddenly, Steve found himself accountable to more than just family and employees. Foundation’s rigorous due diligence process, among other things, involves a technology assessment, a review of the transparency in management dealings, and an evaluation of potential business and corporate development. Overall, the due diligence took around 8  months to complete. Steve was surprised by the value Foundation placed on the entrepreneur, and wondered whether he had the necessary traits to ‘make it’. Steve saw the process of taking on venture capital in three broad categories, where the objective was to limit the threats and risks to venture capital investor. The first was a process of courtship that involves the ‘Pre-heads of Agreement’. At this stage, Ian had to learn about the industry and the company, and Steve had to service the information needs of Foundation in order for them to invest. In exchange, he received snippets of information on Foundation and the investment process. The second was an engagement that led to the signing of a formal Heads of Agreement (HOA), where a two-page document that included information on how much the company was worth, the amount Foundation was willing to invest, and the pre-requisites required prior to the investment being activated. In between courtship and engagement, which took 4–5 months, key man insurance was obtained. Prior to the insurance, health and police checks were performed, and the ‘sanity’ of the CEO was scrutinised.

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To reinforce this process, Steve also had to provide extensive market-related information to convince investors that Mt. Romance had market potential. After the HOA was signed, a shareholder’s agreement and a review of constitution were among the avalanche of paperwork that had to be dealt with. Profitability ratchets were also negotiated against the company’s net profits using an EBITDA-linked mechanism. The final stage of the process was marriage, whereby Foundation Capital negotiated two seats on the Mt. Romance board. The process did come with its share of drama. In December 1998, when Ian recommended the investment of $2m to his Board, Steve had provided the marketing information required and he thought that all technicalities had been resolved through Foundation Capital’s 6  months of intensive due diligence. Just when Steve was about to leave on a business trip to France, he was notified that the Foundation’s Board had rejected the submission for technical reasons. The Foundation Board felt that Mt. Romance was being too ambitious with their technology, and felt it was too risky. Determined to make one last stab at it, Steve had to go to France over the Christmas period to bring back the necessary technical data to meet Foundation’s next meeting in January. He also made a point of inviting the Foundation Board Members to Albany for a tour of the factory. Subsequently, the deal was sealed. According to Steve, Foundation Capital delivered far more punch than normal shareholders. Although Foundation Capital has around a 20% shareholding in Mt. Romance, they have significant power and influence over his business. The marriage, in his opinion, was deemed a success because there was room for compromise and consensus in the relationship. Ian notes that there was admittedly some tension in the beginning when the business was undergoing rationalisation, but Foundation Capital was aware that while reigning in management to be more focused on the core business, it was important not to restrict the creativity inherent in the mindset of its leader. Ian further adds that venture capital comes in as an investor without a hidden agenda. When Foundation made its investment in Mt. Romance, they had to negotiate hard and fast on the valuation. Because an agreement could not be reached on the valuation, a pricing ratchet linked to performance was introduced. The Mt. Romance investment was made in two tranches – the first tranche comprised $1.3m, and the second tranche of $700,000 was released conditionally upon the successful commissioning of the plant and Mt. Romance’s commitment to use the infrastructure to develop new markets. An earlier angel investor had invested at higher valuations, so Steve entered into a deal with this investor to protect him from the ratchet. The operation of the ratchet was a negotiated process that has been sorted out over the duration of a year. Because Stephen felt it was too punitive, Foundation gave some of its entitlement back to reward Steve. According to Ian, one of the hardest issues to negotiate was the Adverse Trading Clause, which basically meant that, if there was a serious breach of the Shareholder’s Agreement or something catastrophic happened to Mt. Romance, Foundation Capital could override the Board and come in and run the company.

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How the Venture Capital Process Shaped Mt. Romance The partnership has grown the equity from $2m to $9m, and now Mt. Romance’s value is estimated at $30 to $40 million. Both Ian and Steve agree that their partnership has brought commercial discipline and market focus to Mt. Romance, and its success can be measured in terms of both parties meeting their prime objective of maximising investment returns through developing the commercial value of the business. Steve adds that the key benefit of a venture capitalist is providing commercial focus to a company, and from his perspective this has added tremendous value to the company. Besides capital, Foundation also provided a good sounding board for Steve’s ideas and opportunities, and they kept him focused on the 5-year business plan, adding value to the core business of selling bulk oil. They kept Steve focused on the bulk oil because that was where the volume and margin was. Steve expressed that going through the process has given their evolving business plan a clear strategic focus, introducing prudential systems, and encouraging better planning and testing of ideas. Ian says that they helped to bring structure to esoteric areas, provided guidance on long-range planning, and were instrumental in shaping the culture of the management team. By shifting away from what was essentially a ‘husband and wife’ team, Mt. Romance now has a well-rounded management team that will continue to develop. In Ian’s view, Mt. Romance has become a more disciplined business and is starting to look more like a public company with a formal Board of Directors, monthly accounts, proper product certification, quality assurance procedures, established product development processes that offer their clients a point of differentiation in terms of new compounds, and effective strategic alliances. Another area where Foundation Capital played a major role was in facilitating Mt. Romance to access management expertise and related professional and knowledge networks. For example, Peter Byers, a founder of one of Foundation Capital’s main investors, UniSuper, brought considerable knowledge of the essential oils industry and pushed for the Mt. Romance technology to be tested against world-best practice. He also introduced valuable professional networks, including Professor Menary from the University of Tasmania who is a leading researcher of essential oil science and an expert on enhancing sandalwood extraction techniques and yields. Professor Menary played an important role in improving Mt. Romance products and processes. Similarly, Robert Mackledown, a previous employee of Essential Oils Tasmania, was a major contributor to Mt. Romance’s new plant design and to the optimisation of operations that brought the facility up to industry specifications. Foundation Capital also brought in a new accountant to up-skill the accounting function, to improve the balance sheet, and to introducing a new level of financial reporting consistent with public company standards. Public company standards in corporate governance were also introduced in the form of regular comprehensive financial, management and technical reports. Ian says that a company can do many things, but not all at the same time. For example, when Steve wanted to enter the ‘cosmo-pharmaceutical’ market, which

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uses sandalwood for therapeutic purposes, Foundation Capital steered him away from this space, primarily because of the possible public liability issues. Foundation Capital also encouraged Steve to close the retail outlet in Melbourne and sell the direct marketing business to Herron, allowing him to concentrate on the bulk oil business and tourism and sales in Albany, and to get away from long-range management. As indicated by Ian, the challenge for the near future is to diversify away from a one-product company. To do this it is necessary to bio-prospect for other compounds and to seek out other sources of sandalwood such as plantations in Shark Bay and Kununurra. Management succession is also an issue, where there may by some apprehension in ‘letting go’. There is also a need for staff to change from generalists to specialists in order for the business to continue growing. Steve adds that, on a secondary level, the prudential measures required by venture capitalists provides a degree of credibility that may pave the way for businesses to access alternate sources of capital, as due diligence is often viewed to have been done on behalf of other financiers and facilitates the mitigation of risk and legwork for subsequent potential financiers. For example, Mt. Romance’s relationship with Foundation Capital gave them a good head start in successfully obtaining a second AusIndustry R&D Start Grant of $1.5 million in April 2003. Steve also adds that Ian is a ‘seasoned warrior’ with a lot of experience and a proven track record, and having an investor with a good reputation is also important when looking to build a good standing in the industry.

Lessons Learnt from Both Sides The execution of a share buy-back by the company in more recent times prompts the question as to whether too much capital may have been invested in Mt. Romance. However, foundation believes that having the additional capital in the company was a necessary prudential and appropriate measure given the early stage risks associated with the investment. If something had gone wrong, immediate access to that additional capital could have been a crucial factor in the company’s survival. Foundation Capital also learnt that gaining certification in France was a difficult process, as it took a lot of time and focus to develop systems that met the requirements. The original business plan underestimated the time required to break into new markets and the subsequent acceptance of a substitute product in established markets. It was a ‘learn-as-you-go’ process, Ian revealed, where Foundation had to juggle and amass the necessary knowledge of the product and distillation technology as well as an understanding of the markets for sandalwood oil. Foundation Capital’s decision process involved a lengthy and rigorous procedure. In describing the means of attaining and thriving within the constraints of venture capital, Steve provides the analogy of joining an elite sports team – in Mt. Romance’s case with Foundation Capital it was selected to be part of an elite financial institution. In terms of lessons learnt from his encounter with venture capitalism, Steve endorses that going through the process of due diligence and Heads of

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Agreement was a valuable exercise, as ‘everyone can have a good idea, but ideas need a lot of hard work to become commercially viable and profitable’. Steve realises that venture capitalists belong to a very serious, systematic, institutionalised industry, and their directive is to ultimately mitigate all possible risks and achieve superior returns for their own investors. Their nature forces them into a bureaucratic system driven by finance and driven by shareholder demands. For example, Foundation Capital’s role is to take care of retirees in Australia and ensure they get a return on their superannuation investment. He likens ventures capitalists to bulldogs – strong, hard business people with aggressive personalities who push their way through. They do not seek to be personally involved in the business and remain unattached until a problem occurs, while for Steve ‘the business is his life – his baby’. In the end: ‘They mature you in terms of discipline and harden you by forcing you to make difficult decisions. This is all good stuff if you want to make money; the partnership between us has brought significant financial rewards to both sides.’ Steve stresses that it is important for the CEO not to ‘self-destruct’ by dwelling on conflicts that arise and taking issues personally. He adds that the process is challenging to one’s physical and psychological state, but it is up to the entrepreneur to actively shape the situation to one’s own advantage. One must be able to ‘absorb the good, brush off the bad and to balance pessimism (the investor) with a good dose of optimism (Steve)’. Steve says it is valuable to have the ability to recognise opportunities within a context of threats and weaknesses. He says it is the venture capitalist’s role to be the ‘devil’s advocate’, where they are on the constant lookout for the threats and weaknesses of the business, whilst it is important for the entrepreneur to be ‘driven by seeing the good in something bad’. The reality, as Steve points out, is: ‘It is lonely at the top. It is a stressful existence – it either kills people or prematurely ages them!’ He states reassuringly that, along with the hard work, the rewards in terms of improving one’s lifestyle will become evident with time.

Issues for a Regional Business Ian elaborates that one of the challenges associated with managing a regional investment is that ‘you can’t just drop in to see how things are going or to address an emergency. However, when you do go and visit, you can focus on the investment because there are less interruptions.’ The remoteness of Albany means that there is a pronounced lack of diversely skilled local workforce and highly qualified personnel, which does affect the business’s ability to resource. For example, one can be limited to what accounting packages can be used because it is difficult to find local people familiar with them. However, Ian points out, ‘you do get good value for money from the human resources available, as Mt Romance is seen as a huge opportunity to its local employees and they take a lot of pride in working there.’ Steve advocates that the growth and vitality of Mt. Romance has been largely a result of the dedication, energy and expertise of the company’s regional staff. To

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illustrate this point, he says that a team of Albany-based staff have coordinated the design and construction of the sandalwood factory, including its corporate image, products and marketing initiatives. Steve also corroborates Ian’s view, saying that the most significant challenge for Albany is that a significant amount of people lack education, have low computer literacy, and are mostly lifestyle oriented. Within a population of 30,000, the narrow employment pool limits the number of employees to between 400 and 500 potentials. On the other hand, Albany does offer good vocational training of tradespeople, and Steve is actively involved in efforts to train and develop future generations by offering sponsorships to school children and being on the Board of the University of Western Australia’s Albany Centre. In his opinion, society has to change in order for businesses to advance. Steve has been hailed as the ‘Sultan of Sandalwood’ in Tim Fisher’s book, Outback Heroes – a tribute to rural Australian entrepreneurs who have overcome the odds to create sustainable futures for their businesses and the regional communities. His personal ‘catch cry’ is ‘how do you value-add, how do you create something novel and new?’ He says for the region, ‘the point of difference is to create businesses with high growth potential in the community that can sell goods and services to another region, nationally or overseas’. To attract equity into a business Steve advises to prepare a business plan to improve the blueprint of the company, invest wisely in information technology, and introduce strategic vision into the company. It is also important for businesses to bring other people along for the ride, which can include angel investors and shareholders from the region  – but avoid giving away equity in the business too early. Using available government assistance in terms of expertise and funding is also a route not to be ignored, as it can provide the company with the necessary infrastructure and knowledge to pursue venture capital. Steve feels that it is important for the government and other regional commercial and economic development institutions to help create the culture of sourcing venture capital among regional enterprises. Steve also notes that another barrier to venture capital investment for regional businesses could be attributable to their isolation from the marketplace and the resultant difficulties in communicating with potential customers. On the other hand, it seems evident that the government helps regional businesses more than Perth businesses in terms of raising awareness, as they have sent bankers and investors on tours of regional businesses, and AusIndustry has established a regional office in Bunbury with organised seminars and information sessions. According to Steve, a business is ready for venture capital investment when they have gained a good track record in terms of sales with a decent margin; they must have the necessary resources in place (around $1 million), and adequate intellectual property protection. He adds that many business owners in the region usually approach venture capital with a laid back altruistic and idealistic attitude, where one is constantly pursuing ‘holy grails’ – essentially preventing any ‘seed culture’ to blossom.

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Ian says that the remote and unique location of Mt. Romance can be a benefit: … as people will travel a long way to experience new things, and the lifestyle of rural Australia can also be attractive. For example, going to Albany and Kalgoorlie is a very novel experience for a French perfume company executive. It is often harder to get someone from Sydney to come to Perth than it is to get an overseas person to visit Albany.

Modern communications and technology have also made remote management much easier, and Foundation Capital is keen on making other investments in rural WA – but the problem is finding the deals. Acknowledgements  This case was prepared in conjunction with the Australian Venture Capital Association Ltd.

Work Book: Intellectual Property Management

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13.1 Learning Objectives After completing this chapter, you should be able to: • • • • •

Understand the nature of intellectual property and IP rights. Review basic legal frameworks and sources of IP protection. Understand the relationship between IP, innovation and business growth. Review different approaches to valuing IP assets. Understand the process of commercialisation.

13.2 Chapter Review This chapter has provided an overview of the nature of IP and how it is protected and valued. A key issue in successful commercialisation of innovation is the identification, ownership and protection of creative output and proprietary knowledge. IP can be formally registered (e.g. patents, trademarks) or automatically assigned upon creation (e.g. copyright). The formal registration of IP provides the recognition of rights, but does not of itself provide legal protection. An IP strategy needs to be created that serves to protect IP and foster its development from intellectual capital, through intellectual assets to IP. It is important to register IP assets within a business via an IP portfolio, to place a valuation on these, and to make strategic decisions as to whether to proceed with their commercialisation or not. Commercialisation is a high risk and costly process, and having a formal approach to its management as illustrated by the IDD framework can be beneficial.

© Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_13

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13.3 Key Lessons • According to the World Intellectual Property Organisation (WIPO), “Intellectual property (IP) refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce”. Ownership of IP allows individuals or companies to enjoy financial benefits from the sale or licencing of this IP. • Formal IP rights are conferred by government authorities in each jurisdiction. These rights require the rights holder to formally register their IP with the appropriate authority and pay a fee. • Before a patent is registered, it must be demonstrated that the invention or process is able to meet three general criteria: it must be new, it must involve an inventive step, it must have industrial application. A patent provides patent owners with protection for their inventions for a limited period, generally 20 years. 1. Patents are granted to the patent owner by the sovereign state for exclusive title to the use, sale and licencing of a device, substance, method or process. This right provides the patent owner with the exclusive right to commercially exploit the invention. A patent gives the owner the right to stop others from using your invention. Alternatively, the owner can choose to let others use it under agreed terms. 2. It is not compulsory for a patent to be registered but, once it is, the inventor must accept the risk that the publication of the patent will result in others copying the idea and thereby breeching their patent rights. • A trademark is a distinctive sign that identifies certain goods or services produced or provided by an individual or a company. The system helps consumers to identify and purchase a product or service based on whether its specific characteristics and quality meet their needs. • An industrial design is the ornamental or aesthetic aspects of an article. A design may consist of three-dimensional features, such as the shape or surface of an article, or two-dimensional features, such as patterns, lines or colour. • There is also the option of employing confidentiality and secrecy within the business to secure IP rights. The company should then require all employees and third-party actors to sign confidentiality or non-disclosure agreements. Use of confidentiality or secrecy provisions may be appropriate where IP cannot be easily patented or registered, or where the process associated with the production of the product or process is particularly complex and where reverse engineering is less likely. • For many companies, the most valuable long-term protection for their products and services is the development of a well-recognised brand name. The end result of a well-considered branding strategy is the generation of substantial ‘goodwill’ in the market. • Any IP strategy should be integrated into the overall business strategy, and should be included in business and marketing plans. The value lies with IP that has clearly defined ownership and that is aligned with the strategic directions being followed by the company.

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• The value of IP assets is often greater than the value of physical assets, and it is advisable to have IP assets formally valued and their value recorded within the firm’s assets register and balance sheet. It is thus important not only to protect IP, but to also value it appropriately. The five common mistakes on that matter are: 1. to enter into negotiations with a third party over a joint venture, merger or acquisition without first properly valuing their IP assets. 2. to undervalue the IP assets, looking at what they are worth today rather than what they might be worth in future alignment with the assets of another partner. 3. to undervalue corporate brands that have been created over many years and would cost substantial amounts to generate from scratch. 4. to value IP assets only after the deal has been negotiated. 5. to value all IP assets collectively rather than individually. • There are many different techniques that can be used to value an IP asset, and this is still an emerging field of activity. A number of different approaches to the valuation of IP assets have been identified. These include the cost, market, income, relief from royalty and real options approaches. • IP rights provide the firm with an ability to generate “isolating mechanisms” that can prevent competitors from securing a similar opportunity in the use of the innovation. • One way to secure isolating mechanisms without formal disclosure is the adoption of Trade Secrets which generate causally ambiguous competencies. There are at least three key sources of causal ambiguity: Tacitness, Complexity and Specificity. • When entering a licence agreement at least four key issues need to be addressed: specifying the agreement boundaries, determining the compensation, establishing rights, privileges and constraints; and specifying the duration of the agreement.

13.4 Learning Activities 1. Consider the IP management processes within your own organisation or an organisation with which you are familiar. Review the current systems of identifying, valuing and protecting IP assets. Are these systems well structured? What changes can you recommend? 2. Using the IP asset management system outlined in chapter 13 (see Figure 13.3) by Harrison and Sullivan (2000), and the best practice systems for new product development outlined by Akgun et  al. (2004), critically evaluate the commercialisation and NPD systems of your own organisation or an organisation with which you are familiar. 3. Consider the three IP assets showcased in the chapter: The Orbital engine, the Redheads trademark, and the Sebel stacking chair. If you had to put a valuation on each of these, what method or methods would you choose and why?

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13.5 Creativity Journal Entry For your fifth journal entry, research the following: • Find and cite your own (i.e. unique to your knowledge) example of a recent (i.e. in the past 3 months) article in a respected business newspaper or journal such as the Australian Financial Review, Business Review Weekly, The Economist, Business Week or similar journal that features: 1. a disruptive technology or service, 2. the value of intellectual property (IP) and its protection, or 3. team building and leadership within entrepreneurial firms. • Discuss the article’s contents and why you chose it, with reference both to what has been covered in this unit and to your personal/work experiences.

13.6 Group Exercise: Professor M’s Dilemma This is a group problem solving challenge that provides you with an opportunity to review the content from Chaps. 7, 8, 9, 10, 11, 12, and 13, and apply their content to addressing a complex problem. Read the following problem and then in a group of other students, solve the problem. Further details of the task are found below.

The Problem Outlined Professor M from the University of Western Australia (UWA) has invented a new process for extracting a by-product from the shells of crustaceans such as lobsters that can provide a significant pain relief medicine for people suffering from Arthritis. While these ingredients are already in use within the pharmaceuticals industry the process innovation developed by Professor M is a significant breakthrough and offers a pure form of the base compounds. Further, the ingredients are currently all imported. Professor M has secured an agreement with the WA Rock Lobster industry to provide him with a constant supply of lobster shells from their processing plants that would otherwise be discarded as land fill waste. According to Professor M: The innovation is related to the method of preparation of a product available in the market and its benefit is widely accepted by consumers nationally and worldwide. The product is supplied nationally only via importation from overseas while ironically the Australian fishing industry is spending money to dispose of a waste which is the source of the product. So, there is a market in Australia for sufferers of Arthritis and clearly our process is viable presenting an opportunity to eliminate waste and also providing the product at a competitive price.

Professor M has been assisted by the UWA Commercialization Office to develop a business plan that seeks to establish a joint venture with a private sector partner.

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To date Professor M and UWA have not developed a strategy for how they will deal with their Intellectual Property rights and do not make routine use of non-disclosure agreements although they do mark documents “CONFIDENTIAL”. They are yet to formally register their IP rights and feel that this should be done prior to the formation of the joint venture. The business plan calls for the establishment of a factory to process the shell fish waste and extract the by-product. It even details the need for the purchase of some trucks and the hiring of drivers to address the logistics of the project. However, Professor M is concerned about the future that this plan outlines for his process. He is not sure whether he should seek to leave his teaching and research work and go into the joint venture as the Director of R&D as proposed. He is also not sure if the University has assembled the right people to lead the company and what the overall governance structure of the new venture should be. He has had previous experience working within major pharmaceuticals firms overseas and is aware of the way such businesses manage their commercialization process. He has not seen any evidence that the University has such experience. According to Professor M: At this point in time to protect our IP we are operating with the signing of confidentiality agreements or a signing of a contract when dealing with potential business partners. In the short term we will be filing for a provisional patent which will give us a bit of time to improve on our innovation and also to attract business ventures. In a year’s time we will be able to lodge a full international patent to western countries only. The natural progression is to set up a company or license the technology to someone else applying an annual fee or percentage on the holdings of the company.

Professor M remains concerned that his research can continue to benefit Arthritis sufferers.

Your Task Explained Working in groups, undertake a critical analysis of this problem. You should apply the Rich Pictures and SIMPLEX process for creative problem solving as outlined in Chap. 3. The group should follow these steps: 1. Each individual group member draws a picture of the present and future desired states. 2. Annotate drawings with five priority functions/features to shift from present situation to desired future state and rank in order of importance. 3. Within the group conduct a ‘round robin’ with each member putting priority functions/features to the group without evaluation or criticism. 4. Rank functions/features in order of importance. 5. Develop a problem statement that summarises the underlying causes of the problem.

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6. Draw on material from the text, in particular Chaps. 7, 8, 9, 10, 11, 12, and 13, and other readings to help you build an evidence-based argument and follow the SIMPLEX process in applied creativity. 7. Prepare a final solution (approximately four pages) and present to the class.

13.7 Case Study Analysis Read the AQ2 Smartaflow case study in Chap. 11, which provides an example of a new technology seeking to achieve commercialisation. Once you have read the case you should then answer the following questions: • What were the key technical and marketing problems facing Chris Speight when he was trying to commercialise his product? • How important is IP protection for the future commercialisation of the Smartaflow Chlorisafe system, and what has been the approach taken by AQ2 in protecting its IP assets? • If you had to draw up an IP strategy for AQ2, what might be the things you would want to consider? In doing this, make reference to what they might include in an IP asset register and how they might value these assets. • AQ2 has alliances with the Water Corporation, Baker’s Junction Machinery and several sub-contractors. Discuss the benefits of these alliances as well as the potential risks with reference to the protection of the company’s IP assets.

References Akgun, A.  E., Lynn, G.  S., & Byrne, J.  C. (2004). Taking the guess work out of new product development: How successful high-tech companies get that way. Journal of Business Strategy, 25(4), 41–46. Harrison, S., & Sullivan, P. H. (2000). Profiting from intellectual capital: Learning from leading companies. Industrial and Commercial Training, 32(4), 139–148.

Work Book: Social Innovation and Enterprise

14

14.1 Learning Objectives After completing this chapter, you should be able to: • Understand the concept of social entrepreneurship. • Define social entrepreneurship and innovation, and distinguish them from traditional entrepreneurship. • Recognise the importance of the social economy. • Understand the nature of co-operative enterprise and its contribution to economic and community development. • Understand the theory of community-based enterprise. • Examine the role of social entrepreneurs via case studies.

14.2 Chapter Review This chapter has provided an overview of the concepts of social entrepreneurship and innovation. It has highlighted the fact that social entrepreneurs use the same skills and behaviours of traditional entrepreneurs, but for a social rather than an economic purpose. The social entrepreneur can be found in a wide range of environments that can include non-profit and voluntary organisations through to for-profit organisations. Social entrepreneurship seeks to build a social value proposition that draws together people and capital to exploit opportunities for social capital building. Social entrepreneurship and innovation are new and emerging concepts that remain poorly defined. However, since the 1990s there has been a growing recognition of the importance of the social economy and the social enterprise. The ‘third © Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4_14

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way’ was a reaction to the ‘economic rationalism’ that became prominent in the 1980s. An important form of social enterprise is the co-operative. This type of business model has been in operation for centuries, and the principles of the Rochdale Society founded in 1844 remain the basis for the global co-operative enterprise movement that encompasses some of the largest business organisations in the world. Co-operatives offer economic and social benefits to their members and can be found in a wide range of industries. They play an important role in regional and community development. However, co-operatives suffer from some generic problems associated with their collective ownership rights, and recent trends have seen the formation of a new generation co-operative business model designed to alleviate some of these problems. The theory of community-based enterprise (CBE) suggests that, where a community is suffering economic or social stress but has a tradition of collective problem-solving and sufficient social capital willing to become involved and provide the necessary critical mass, a CBE can form. It will be based on available community skills, have a range of goals, and succeed if there is sufficient community participation.

14.3 Key Lessons • While entrepreneurship has been viewed as a process of self-directed, individualistic and profit maximising opportunism, the reality is that many entrepreneurs and innovators are not totally focused on personal wealth creation. • Social entrepreneurship can be defined as innovative, social value creating activity that can occur within or across the non-profit, business or government sectors. Rather than a dichotomous separation into for-profit and not-for-profit forms of entrepreneurship, the process should be viewed as a continuum that ranges from the purely social to the purely economic. • Social entrepreneur differs from that of the traditional entrepreneur in several ways: (i) the context in which the social enterprise venture is taking place (e.g. performance measures), (ii) their deployment of resources (e.g. much of the work force may be voluntary in social ventures), (iii) the deals they do (exchange assets of a non-economic value for social ventures, of economic value for conventional ones). • By its nature, a social innovation must meet the test of innovation by being new or novel and also by being primarily for the wider social benefit. • The concept of the social economy traces its origins back to at least the early nineteenth century (encompassing voluntary and non-profit organisations, charities, philanthropic organisations and foundations). The rise of the economic rationalism of the 1980s did not meet with universal approval, and this has given the notion of corporate social responsibility (CSR). The 1990s saw the emergence of a greater recognition of the social economy that included co-operative enterprises, non-profit organisations and the role of voluntary, community and philanthropic activities.

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• Under the European Charter of the Social Economy, an organisation falls within this arena when: 1. It is an autonomous enterprise. 2. Its members join voluntarily, are responsible, have equal rights and obligations, and are focused on self-help interest. 3. They must also be democratic (e.g. one-member-one-vote), and members must own at part of the assets. 4. They should also be designed to provide services for the exclusive benefit of their members, and be member not investment focused. 5. The creation of employment and the enhancement of member welfare and education also define these organisations. 6. Finally, they should be independent and autonomous from the state. • One of the oldest and most enduring forms of social enterprise is the co-­operative, or mutual business. A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise. • Despite many having been founded in the 19th and early 20th Centuries, many mutual enterprises have been demutualised and converted into investor owned firms. This has particularly occurred in the banking and financial services sector. • CMEs should not be confused with non-profit organisations, and they are in many respects not really part of the Third Sector. The Co-operative is a different form of social enterprise and forms what might be described as the Fourth Sector. Co-operatives are generally established primarily for the economic benefits they can provide to their members, with social benefits as a secondary issue. • The co-operative principles, as for the International Co-operative Alliance, are: (i) voluntary and open membership, (ii) democratic member control, (iii) member economic participation, (iv) autonomy and independence, (v) education, training and information, (vi) co-operation among co-operatives and (vii) concern for community. • The co-operative business model is thus viewed as offering an ideal balance between the objectives of profit and self-interest, with the capacity to provide services where they are required. • Co-operatives have proven to be a successful and enduring business model they suffer from what have been defined as the five generic problems, most of which relate to the issue of vaguely defined property rights: 1. The free rider problem emerges wherever property rights cannot be traded, or where they are insecure or unassigned. 2. The horizon problem emerges where the residual claims a member of a co-­ operative might make over the net income generated by an asset is shorter than the productive life of that asset. 3. The portfolio problem emerges from the lack of transferability and liquidity of the members’ equity in the co-operative enterprise.

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4. The control problem emerges from the divergence of interests that takes place between the co-operative membership and its management. 5. The influence cost problem: For many co-operatives, the strategic focus becomes fuzzy and the enterprise seeks to engage in a wide range of diverse activities. 6. New Generation Co-operative’ (NGC) are designed following a business model that will overcome the generic problems inherent in the co-operative enterprise. The NGC is thus a one-member-one-vote democratic organisation in keeping with the principles of the co-operative, but where earnings are distributed based on shares owned by members. Unlike the traditional co-­ operative, membership is restricted. • Community-based enterprise (CBE) occurs where a community acts in an entrepreneurial way to create a new enterprise that remains embedded in the existing social structure. Such CBEs are formed and managed in order to pursue the community’s economic and social goals in a way that offers sustainable benefits for both the individual and the group. • The characteristics of the CBE are: Based on available community skills, A multiplicity of goals. Dependent on community participation.

14.4 Individual Research Paper The purpose of this assignment is to assess your understanding of the concepts associated with social entrepreneurship, co-operative and mutual enterprises. Write a research paper of around 2500 words and address the following issues: 1. What is the social economy and why should it be recognised as an important element in the wider national economy? 2. With reference to the principles of the co-operative movement, discuss why the co-operative is a unique form of business enterprise. … The concept of a business model has no established theoretical grounding in economics

14.5 Case Study Analysis Read the Bendigo Bank case study, which provides an example of a community-­ based enterprise and social entrepreneurship project. Once you have read the case, you should then answer the questions below.

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Questions/tasks 1. What were the key motivations as well as the key challenges faced by Vicki Brown and Jan Pope in trying to get the Bendigo Bank established in Tambellup and Cranbrook? 2. Discuss, with reference to the case, what this suggests about the nature of social entrepreneurship and innovation. Does it support the theory of community-based enterprise? 3. Do you think that Vicki Brown and Jan Pope can be called social entrepreneurs? Give reasons why you either agree or disagree.

14.6 Case Study: Bendigo Bank, Tambellup and Cranbrook By: Amada Jappu. We deserve a better deal on banking. Banking is an essential service. They have betrayed us with their failure to deliver basic access that is fair and affordable … costs have risen, customer service is poor and branches have closed, Louise Petschler, senior policy officer, Australian Consumers Association.

In August 1998, two women were listening to the radio. Vicki Brown, in Tambellup in the Wheatbelt of Western Australia, and Jan Pope, 40 kilometres away in Cranbrook, were listening to the same show. On it Max Trenorden, the State Member of Parliament for the district of Avon, was discussing his recent visit to Victoria to attend the opening of the first community bank there. Both women reached for the phone at the same time to ask Trenorden whether a community bank would work in their communities, and the idea for the Tambellup and Cranbrook Community Bank was conceived.

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A Brief History About 12 years ago, both the Bank of New South Wales and Westpac announced that they were closing their Cranbrook branches. In 1996, the Westpac branch at Tambellup also announced that it was closing. The branches were first reduced to agencies, and then these were also closed. People in the shires had to go to Katanning, Albany or Mount Barker in order to do their banking. Local businesses and even local government officials had to drive distances of up to 100 km with large quantities of cash. At the same time, people did their shopping and other errands there, meaning that Tambellup and Cranbrook lost not just their banking business but that other small businesses also suffered. Tambellup estimated that it was losing $26,000 per week in ancillary business to other towns. Shopkeepers had to keep high levels of cash on their premises in order to cash pay cheques for agricultural workers, and the agri-business incubator began to suffer because there was no bank in the area. Many businesses and organisations began to ask whether it was worth going into these towns because of a perception that they weren’t big enough to have their own bank. Vicki Brown, a local councillor for Tambellup, tried to get various credit unions interested in opening a branch there through the Australian Federal Government’s Credit Care programme. The credit unions did not feel there was critical business mass; and nor was the community supportive of a credit union because they wanted full banking facilities. Other banks that Vicki tried to persuade to come to Tambellup felt that they did not have the agri-business knowledge and that the business base was too small. They felt that internet banking was the way forward.

The Bendigo Community Banking Model Successful communities create successful banks. (S. Cornwall, Manager, Bendigo Bank)

Bendigo Bank’s community banking model was developed in response to demand for local bank branches from small mining communities in Victoria, Australia. The aim was to provide basic banking facilities in the short-term, and to provide improved return on capital and enhanced community prospects in the longer term. Each community bank is operated as an individual company under a franchise arrangement. The community purchases the right to run a banking branch from Bendigo Bank. The community company has to raise funds to purchase the franchise, secure the branch premises, and them equip them, select and recruit staff, and pay branch running costs. Bendigo Bank provides a banking licence, a full range of products and services, staff training, systems, marketing and back office functions such as treasury and cash management. Bendigo Bank also underwrites all loans made by the branch, thereby taking on the credit risk.

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The franchise is owned by shareholders or ‘contributors’ from the local community. The maximum shareholding is $10,000 and each shareholder, no matter how big their investment, has one vote. This ensures that power is not concentrated in the hands of a few individuals. The aim is to have as wide a shareholder base as possible to ensure community ownership. In the case of Tambellup and Cranbrook, the upfront cost of the franchise was $50,000 for 5  years, and Bendigo Bank takes an annual fee of 50 percent of gross profit.

Getting It Going Responding to the calls from Jan and Vicki, Max Trenorden approached Bendigo Bank to ask them if they would visit Western Australia (WA). At the time, Bendigo Bank did not have a presence in WA. In order to make the visit worthwhile, they required at least five communities to be interested in a community bank, each with certain minimum populations. Tambellup and Cranbrook offered to be two of those communities; the others were Kulin, Goomalling and Frankland. In February 1999, representatives from Bendigo Bank addressed a local government meeting in Perth attended by Jan. Following this, Vicki and Jan organised community meetings in Tambellup and Cranbrook on consecutive days for Bendigo Bank to present the community bank model. Vicki and Jan printed flyers which were mailed to every ratepayer in the shires. Vicki admits that the flyer she sent out in Tambellup was intentionally confrontational, telling people to, … Stop moaning about having no bank and do something about it.

Sheer hard work and persistence was vital; Vicki and Jan called everyone they could reach in the Tambellup and Cranbrook telephone books to gauge interest and encourage them to come to the meetings. At the first community meeting in Tambellup, at which Bendigo Bank presented, only 70 people turned up. Out of a population of 750 this was less than 10% success rate. Many of those that came did so only to complain about the ‘rude’ flyer. Jan attended the meeting in Tambellup and saw how many people were there. She knew that they had to get at least that many people, if not more, to the Cranbrook meeting the following day. She drove home after the Tambellup evening meeting, arriving after midnight, and spent the night sending fax messages to as many people as she could, encouraging them to attend. The next day, she got on the phone and called more people. She succeeded in getting 75 people to the Cranbrook meeting that night. Again, out of a population of 1150, this was still a poor percentage. Despite the disappointing attendance, the meetings were a success because the idea gained unanimous support. At the meetings, volunteers were asked to participate in Steering Committees for both shires. Jan became Chair of the Cranbrook Steering Committee, and Vicki became Chair of the Tambellup Committee. Each had 12 members.

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Working Together Tambellup and Cranbrook had a joint cricket team that travelled together to other parts of the state to play. Although they had never worked together on a major community project, they used the cricket team as a basis for coming together. For example, … “They were smart enough to realise that they couldn’t do it alone. The friendly rivalry between the communities helped. They were two of the smallest towns in Australia to host community banks. It was the first joint branch and was one of the things that made the project unique” (S. Cornwall, Manager, Bendigo Bank).

The friendly rivalry was used to advantage. Jan would tell people in Cranbrook that Tambellup had raised more contributions than them, and Vicki would tell people in Tambellup that Cranbrook had raised more. A little emotional blackmail was used to turn parochialism on its head for the benefit of the community.

A Painful Process The steering committees arranged for a feasibility study to be conducted by Bird Cameron accountants. Tambellup and Cranbrook were fortunate in receiving some government funding for the feasibility study. The government contributed $10,000, and each shire had to pay $5000 each for the study. Survey questionnaires were sent to every business and householder in the shires asking about banking business volume. Forty-two people were interviewed by Bendigo Bank and Bird Cameron. The feasibility study estimated that there was $100m of banking business in both shires, comprised of farming, small business and personal banking. The study estimated a portfolio of $26.7m of business by the end of the 3rd year of operation, meaning that the joint branch would achieve sufficient business volume to go ahead. Following the feasibility study, the steering committees had to call on local people to pledge to become shareholders. It was no small feat to convince people to invest prior to opening. There was no guarantee of the level of business that would flow to the bank after opening, and investors had to be made aware that they would be unlikely to receive a return on their investment for 4 or 5 years. In addition, they could only buy or sell shares once every 6 months. It was an ‘act of faith’; there was no guarantee of success. According to Vicki Brown, … “Both Jan and I felt burdened with guilt and worry. We were recommending that people invest their money in a project, and these people were our friends and neighbours – if it failed, we would feel responsible.”

The steering committees estimated that $200,000 would be needed for start-up. However, as the franchise was shared between two towns, it required two buildings and two fit-out costs, so the actual start-up amount was much higher than this. $295,000 was raised through contributions from community investors; with an

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average investment of only $2000, this was a testament to the number of community investors involved. Vicki Brown and Jan Pope describe themselves as a ‘civic mothers.’ During the 9 months between the start of the project and the bank opening, the steering committees spoke to every local organisation and group that they could get access to, and over 20 community meetings were held. Any conflict that arose during these meetings was resolved then and there, ensuring that everyone had a common understanding. There were no funds available for marketing, but despite this, lots of excellent publicity was obtained by the steering committees. As well as the local Tambellup Topics and the Cranbrook News, local papers in Katanning and Albany were presented with stories and photographs. In most cases, the publicity referred to the bank as the ‘community bank’ or ‘your bank’, rather than as ‘Bendigo Bank’, in order to engender a feeling of community ownership. The steering committees evolved into legal Board structures. Once people had given pledges to become shareholders, a formal prospectus had to be issued in line with Australian Securities and Investments Commission (ASIC) rules. Compliance with ASIC rules and the responsibilities of company directors were more onerous than many Board members had imagined, and the due diligence process (i.e. the process of ensuring that accurate, legal and regulatory information appears in the prospectus) was arduous. The Board was used to dealing with local community issues, but not with business and commercial issues. As explained by Vicki Brown, … “We didn’t know what we were doing sometimes and we had to seek help from external sources. Bird Cameron helped. We had a former bank manager who lived here and we asked family, friends, accountants – anyone who could help. Most important of all, we had each other for support – we were all in the same position so we weren’t working in isolation.”

There were community concerns over confidentiality. Some people thought that the board members and employees of the bank would know their financial details. The board had to work hard to convince people that the strictest confidentiality would be maintained by employees, and that the board members would not have access to any account information. They had to convince people that it was properly segregated and legitimate. This has had to be continually demonstrated, and yet people still stop board members in the street to ask why their loan wasn’t approved, or other questions connected with their banking. Many people in the community thought the bank would fail. At the time prior to opening, the ABC was running a fictitious TV programme called Sea Change, which featured a corrupt councillor and his girlfriend who were planning to run off with the community bank’s money. In addition, the Cranbrook shire had lost money in 1991 as a result of the collapse of the Permanent Building Society, making people very wary of new financial enterprises. The big four banks (ANZ Bank, Westpac, NAB and the Commonwealth) were regularly in the press denigrating Bendigo Bank and warning that its credit rating was low.

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These hurdles were overcome through persistence and through a feeling that it would be worth it in the end. The banks opened in November 1999 with street parties and great fanfare in the local communities. According to Jan Pope, … “We pushed through the obstacles as they came up. The process took nine months, and it was like giving birth – only harder. But it was simply the right thing to do for the community.”

The First Year Waivers of fees and duties were offered for a short period after opening to encourage people to switch banks. The bank is staffed by local people – Keith McLuckie is the Bank Manager, and there is one full-time Customer Service Officer, Beth Trezona, who had moved out of the area but came back to work in the bank. In addition, there are two part-time Customer Service Officers. The staff are shared between the branches, with each branch open for three half-days per week. A full range of household and business services is provided, including financial advice and tax planning. Online banking is available but is not promoted; the aim of the community bank is to encourage people to come into the branch to do their banking. The first year was the most difficult time. 1999 was not a good year for local agriculture. Local people were slower than expected in moving their accounts to the community bank, making the first 12 months a ‘touch-and-go’ period, with some people sitting on the fence because they were uncertain that the bank was a safe place for their money. Unexpected competition arose from Elders, Australia Post and rural transaction centres. Cash flow was strained and an overdraft was required from Bendigo Bank. This was unusual, only one in five branches usually requires overdraft facilities, but costs were higher than anticipated because in this instance there were two premises to pay for. The community also had some issues with Bendigo Bank as the franchisor. At the beginning, the whole concept of community banking took off so fast that Bendigo Bank did not really have the people to cope with it. The needs of rural producers in WA are very different to those in Victoria. Bendigo Bank was conservative and somewhat inflexible in its lending policies because it didn’t really understand the financial issues facing farmers, such as seasonal cash flow. Thus, the requirement for security was higher than farmers were used to.

Four Years of successful Operation At the time of writing, the fourth year has shown a gross profit of over $2m, and a small dividend will be paid to investors. The bank now has a business portfolio of $34m in business, with 1724 accounts and the potential for further increases because there are still some ‘fence-sitters’ in the community. In year three, a portfolio of $31.5m was achieved, exceeding the $26.7m estimated in the feasibility study. Out

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of net profits, half will be returned to investors and half will be used as seed funding for community projects. Profits from the bank are generated by postcode, so any surplus will be distributed back to those areas that have given the bank the most profitable business. An independent panel will be set up with requests for funding sought from local community groups. In this way, the community can reap the benefits of its efforts and keep the proceeds within the towns. The range of rural banking products has been improved and expanded by Bendigo Bank over the past 3 years. Lending guidelines have been altered to be more accommodating to rural producers. The bank manager, Keith McLuckie, has written a rural banking policy for Bendigo Bank. The bank returned the banking service to the community and provided work for local people, but this only scratches the surface of the difference the bank has made to the local communities. The communities achieved something together that lifted community spirit. Beth Trezona, a local resident, returned to the town as a result of the bank. At a recent high school graduation ceremony, one of the girls graduating said that her ambition was to work in the community bank; this was a chance for the town to see how the bank helped to attract and retain its young people. School banking was provided, and most of the local children have a savings account. Local business owners report that bank opening days are now their busiest times. More importantly, the bank has been used as an icon of what the community can achieve and as a catalyst to do other projects; they succeeded with the bank, so why shouldn’t other community improvement projects succeed? Reflecting on the process, both Vicki and Jan admit that they had days when they nearly gave up on the project. Both of them claim that they were not responsible for the success of the project, and that it could not have happened without the involvement of many people. Certainly, they were responsible for starting the project and getting community buy-in. Overall, they say that the most wonderful thing is the enthusiasm and optimism of a rural community doing something for itself. As noted by Keith McLuckie, … “The best thing is the way people talk about ‘their’ bank. There is no bank-bashing here. The community completely embraced it and is proud of what they’ve done.”

Appendices

 ppendix A – Work Book: General Measure of Enterprising A Tendency (Version 2) Sally Caird

Introduction Enterprise may be expressed by starting your own business, operating as an intrapreneur within an organisation or setting up community ventures. This self-assessment should take you about ten minutes to complete and will give you an idea of your enterprising potential. There are no right or wrong answers, you are asked to decide if you tend to agree or disagree with each statement. For each statement select the answer which best expresses your views. Answer quickly and honestly since this gives the best picture of yourself. Instructions for Completing Test Go to the online portal: http://www.get2test.net/index.html#home Click on the “TAKE GET2” button and follow the prompts as you work through the questionnaire. There are 54 questions and you must answer all of them by simply agreeing or disagreeing with each statement. Once you have completed the test press the button marked “How enterprising am I?” This will automatically generate a report that you can print out from the website. Print your report (perhaps as a PDF file) and read the findings carefully with reference to the information on the GET Test outlined in Chap. 2 of the textbook.

© Springer Nature Singapore Pte Ltd. 2020 T. Mazzarol, S. Reboud, Workbook for Entrepreneurship and Innovation, Springer Texts in Business and Economics, https://doi.org/10.1007/978-981-13-9416-4

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Questions 1. I would not mind routine unchallenging work if the pay and pension prospects were good. 2. I like to test boundaries and go where no one has gone before. 3. I tend not to like to stand out or be unconventional. 4. Capable people who fail to become successful have not usually taken chances when they have occurred. 5. I rarely day dream. 6. I have strong opinions and find it difficult to switch off from work. 7. You are either naturally good at something or you are not, effort makes no difference. 8. Sometimes people find my ideas unusual. 9. I would rather buy a lottery ticket than enter a competition. 10. I like challenges that stretch my abilities and get bored with things I can do quite easily. 11. I would prefer to have a moderate income in a secure job rather than a high income in a job that depended on my performance. 12. At work, I often takeover projects and steer them my way without worrying about what other people think. 13. Many of the bad times that people experience are due to bad luck. 14. Sometimes I think about information almost obsessively until I come up with new ideas and solutions. 15. If I am having problems with a task, I leave it, forget it and move on to something else. 16. When I make plans, I nearly always achieve them. 17. I do not like unexpected changes to my weekly routines. 18. If I wanted to achieve something and the chances of success were 50/50 I would take the risk. 19. I think more of the present and past than of the future. 20. If I had a good idea for making some money, I would be willing to invest my time and borrow money to enable me to do it. 21. I like a lot of guidance to be really clear about what to do in work. 22. People generally get what they deserve. 23. I am wary of new ideas, gadgets and technologies. 24. It is more important to do a job well than to try to please people. 25. I try to accept that things happen to me in life for a reason. 26. Other people think that I am always making changes and trying out new ideas. 27. If there is a chance of failure, I would rather not do it. 28. I get annoyed if people are not on time for meetings.

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2 9. Before I make a decision, I like to have all the facts no matter how long it takes. 30. I rarely need or want any assistance and like to put my own stamp on work that I do. 31. You are not likely to be successful unless you are in the right place at the right time. 32. I prefer to be quite good at several things rather than very good at one thing. 33. I would rather work with a person I liked who was not good at the job, rather than work with someone I did not like even if they were good at the job. 34. Being successful is a result of working hard, luck has little to do with it. 35. I prefer doing things in the usual way rather than trying out new ways. 36. Before making an important decision, I prefer to weigh up the pros and cons fairly quickly rather than spending a long time thinking about it. 37. I would rather work on a task as part of a team rather than take responsibility for it myself. 38. I would rather take an opportunity that might lead to even better things than have an experience that I am sure to enjoy. 39. I usually do what is expected of me and follow instructions carefully. 40. For me, getting what I want is a just reward for my efforts. 41. I like to have my life organised so that it runs smoothly and to plan. 42. When I am faced with a challenge, I think more about the results of succeeding than the effects of failing. 43. I believe that destiny determines what happens to me in life. 44. I like to spend time with people who have different ways of thinking. 45. I find it difficult to ask for favours from other people. 46. I get up early, stay late or skip meals if I have a deadline for some work that needs to be done. 47. What we are used to is usually better than what is unfamiliar. 48. I get annoyed if superiors or colleagues take credit for my work. 49. People’s failures are rarely the result of their poor judgement. 50. Sometimes I have so many ideas that I feel pressurised. 51. I find it easy to relax on holiday and forget about work. 52. I get what I want from life because I work hard to make it happen. 53. It is harder for me to adapt to change than keep to a routine. 54. I like to start interesting projects even if there is no guaranteed payback for the money or time, I have to put in.

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Answer and Scoring Sheet Row 1

46 A D

37 A D

28 A D

19 A D

10 A D

1 A D

Row 2

47 A D

38 A D

29 A D

20 A D

11 A D

2 A D

Row 3

48 A D

39 A D

30 A D

21 A D

12 A D

3 A D

Row 4

49 A D

40 A D

31 A D

22 A D

13 A D

4 A D

Row 5

50 A D

41 A D

32 A D

23 A D

14 A D

5 A D

Row 6

51 A D

42 A D

33 A D

24 A D

15 A D

6 A D

Row 7

52 A D

43 A D

34 A D

25 A D

16 A D

7 A D

Row 8

53 A D

44 A D

35 A D

26 A D

17 A D

8 A D

Row 9

54 A D

45 A D

36 A D

27 A D

18 A D

9 A D

Row tally

 ow to Score Your Responses H Starting with box 1 in the top right corner of your Answer and scoring sheet and, working across to the left, give yourself one point for every D that you have circulated in the shaded boxes, for example: 1 A D

Also give yourself one point for every A that you have circled in the unshaded boxes, for example: 10 A D

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When you have added up your total score for each row, write it down in the Row tally. When you have calculated all rows transfer your scores for each row into the boxes below.

 hat Scores Measure W The GET test measures enterprising tendency by measuring five entrepreneurial attributes as follows: 1. Need for achievement  – this is measured in row 1 and row 6 of the scoring sheet, i.e. questions 1, 10, 19, 28, 37, 46, 6, 15, 24, 33, 42, 51. 2. Need for autonomy – this is measured in row 3, i.e. questions 3, 12, 21, 30, 39, 48. 3. Creative tendency – this is measured in rows 5 and 8, i.e. questions 5, 14, 23, 32, 41, 50, 8, 17, 26, 35, 44, 53. 4. Calculated risk taking – this is measured in rows 2 and 9, i.e. questions 2, 11, 20, 29, 38, 47, 9, 18, 27, 36, 45, 54. 5. Locus of control – this is measured in rows 4 and 7, i.e. questions 4, 13, 22, 31, 40, 49, 7, 16, 25, 34, 43, 52. Even numbers on the scoring sheet represent positive entrepreneurial statements. Shaded odd numbers on the scoring sheet represent negative entrepreneurial statements.

Calculating Your Score Row 1

[

] ]

= Need for achievement

[

]

= Need for autonomy

Add together = [

]

= Creave tendency

Add together = [

]

= Calculated risk taking

Add together = [

]

= Locus of control

[

]

= Total score (right column)

+

Add together = [

Row 6

[

]

Row 3

[

] only

Row 5

[

]

+ Row 8

[

]

Row 2

[

]

Row 9

[

]

Row 7

[

]

+

+ Row 4

[

]

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Interpreting Your Score General Enterprising Tendency (GET) The maximum score (representing General Enterprising Tendency) is 54. • 44–54 – This score means that you are very enterprising (High). • 26–43 –This score means that you have some enterprising qualities (Medium). • 0–26 –This score means that you are probably happiest working with guidance from superiors (Low). If your enterprising tendency is high this means that you have the following qualities. You: • • • • •

have a strong need for achievement; like to be in charge; seek opportunities and use resources to achieve plans; believe that you possess the qualities to be successful; and are innovative and willing to take a calculated risk.

If your enterprising potential is low then: You would probably prefer to work in employment. If your present employment circumstances are not satisfactory then perhaps you should consider careers counselling and aptitude testing. If your enterprising potential is medium and scores for need for achievement, creative tendency or calculated risk-taking are not high then: You probably wish to consider ‘tried and tested’ small business ideas that fit in with your lifestyle. If your enterprising potential is medium and scores for need for autonomy are not high then: Starting a business is not the only option for you. You would probably be equally happy to work as an employee as part of an organisational team or on your own projects.

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If your enterprising potential is medium and scores for locus of control are not high then: Although you have some entrepreneurial qualities, if you wish to start a business you may need to develop your self-confidence and business skills to make a success of the venture. Entrepreneurial Qualities: Need for Achievement The maximum score is 12; high score is 10–12; low is 0–6. If your need for achievement is high this means that you have the following qualities. You: • • • • • • • • • • • • •

have an orientation towards the future; rely on your own ability; have an optimistic rather than a pessimistic outlook; have a strong task orientation; effectively manage time; judge people on results; are restless and energetic; defend your ideas and views; ensure that your objectives are met even when difficulties arise; take responsibility and persist to achieve aims; set yourself challenging but realistic goals; and work long and hard when necessary.

You may need to be careful about maintaining your work life balance and in particular taking care of your health and important relationships in your life. If your need for achievement is low then: Achievement may not be one of your high priorities. Perhaps setting up and running a business would be too much hard work.

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If your need for achievement is high and your GET score is high then: You are interested in considering business ideas with potential for growth, expansion in global as well as local markets. If your need for achievement is high and your GET score is low then: You may prefer a high achieving job as a manager or intrapreneur within an established organisational system to setting up and running your own business. If your need for achievement is not high and your GET score is high then: You may be happy with self-employment or setting up a small business venture rather than putting a lot of effort into business growth or global expansion. Entrepreneurial Qualities: Need for Autonomy/Independence The maximum score is 6; high score is 4–6; low is 0–2. If your need for autonomy is high this means that you have the following qualities. You: • • • • • • • •

prefer to work alone; need to do your ‘own thing’; have to say what you think; dislike taking orders; like doing unconventional things; like to make up your own mind; are not responsive to group pressure; and are stubborn and determined.

You like to take charge of projects that you are involved with, although you do not always like working with other people. You may need to work at developing good relationship skills with clients, employees, suppliers and authorities since this is important even in very small businesses.

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If your need for autonomy is low then: You probably prefer to be advised about managing your work and would not enjoy the responsibility of taking charge of a business. If your need for autonomy is high and your GET score is low then: You may be a bit of a loner or have a touch of the rebel, which makes you better suited to self-employment than employment. You need to develop other entrepreneurial skills if you are going to be successful in business. If your need for autonomy is not high and your GET score is high then: You may be happy to work as an intrapreneur as a valuable member of an organisational team. If you start your own business you may need to cultivate stronger independent leadership qualities. Entrepreneurial Qualities: Creative Tendency The maximum score is 12; high score is 10–12; low is 0–6. If your creative tendency is high this means that you have the following qualities. You are: • • • • • • • •

imaginative; intuitive; a good guesser; innovative; someone who likes novelty; versatile; curious; and enjoy new challenges.

If your creative tendency is low then: You would probably look to others for entrepreneurial ideas but are probably content with proven, traditional business approaches.

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If your creative tendency is high and your GET score is high then: You may need to be careful about over-extending yourself and following up too many opportunities. It may be important to develop skills in evaluating ideas to assist with decisions about which ideas to prioritise for investment and development. If your creative tendency is high and your GET score is low then: Although you are inventive you may have problems bringing your ideas to fruition and may even have had experiences with other people plagiarising your ideas. It may be that business is not the only or most appropriate vehicle for your creative expression and you may consider other scientific, artistic or technical occupations. If your creative tendency is not high and your GET score is high then: You would probably be happiest with ‘tried and tested business ideas’, such as plumbing services, dentistry, hairdressing, etc. If you wished to establish a more innovative business then you might like to consider developing you own latent creative skills or finding an innovative business partner. Entrepreneurial Qualities: Calculated Risk Taking The maximum score is 12; high score is 10–12; low is 0–6. If you scored high as a calculated risk taker this means that you have the following qualities. You: • • • • • •

can act on incomplete information; are good at judging when incomplete information is sufficient; can accurately assess your own capability; can evaluate the likely benefits against the likely costs of proposals; set yourself challenging but attainable goals; and are good at using information to calculate probabilities linked to outcomes.

You are very good at sizing up opportunities and filtering information to help you take calculated risks.

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If your calculated risk-taking score is low then: You are not happy about taking on any risk and perhaps you have too many responsibilities or too few personal resources to allow you to feel comfortable about taking financial or business risks. If your calculated risk-taking score is high and your GET score is low then: You may be a bit of a thrill seeker or even a gambler, and enjoy managing uncertainty. If you wish to set up and run a business successfully then you may need to develop additional skills to help you to set up and run a business successfully. If your calculated risk-taking score is not high and your GET score is high then: You would probably be happiest with ‘tried and tested business’ ideas, less risky business ideas, or business ideas where a partner takes the risks (even if that includes the potential rewards). Entrepreneurial Qualities: Internal Locus of Control The maximum score is 12; high score is 10–12; low is 0–6. If you scored high having an internal locus of control this means that you have the following qualities. You: • seek and takes advantage of opportunities; • do not believe in ‘fate’; • believe you have control over own destiny and that you make your own ‘luck’; • are proactive; • are self-confident; • are determined and strong willed; and • equate results with effort. You strongly believe that your personal qualities and efforts will help you to achieve your aims in life.

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If your locus of control score is low (an external locus of control) then: You may have experienced some knocks to your self-confidence which lead you to doubt that your personal qualities and efforts will help you to achieve your aims in life. You believe that luck and fate will determine what happens to you in life, and determination and hard work will not make much difference. If your locus of control score is high (internal) and your GET score is low then: You may be satisfied in a managerial role rather than starting up and running your own business. You are probably quite satisfied with what you have achieved. You may believe that you could if you wanted to, set up a successful business. If your locus of control score is low (external) and your GET score is high then: You may need to develop your self-confidence and exert greater control over the development of your ideas. Self-confidence could be strengthened by developing specific business skills in areas that you feel could be improved. Without greater self-confidence you may over-rely on others, such as partners or clients, and this could engender greater business risk.

 ppendix B – Work Book: Diagnosing Your Innovation A Management Tim Mazzarol and Sophie Reboud © Copyright, T Mazzarol & S Reboud 2010. All rights reserved. Materials are made available for educational use by students, teaching staff and researchers with appropriate recognition to the authors. No commercial gain may be made from the materials presented here without the express written permission of the authors.

Introduction The purpose of this questionnaire is to examine the current position of your business and its innovations. There are no right or wrong answers, and you will get more from the findings if you answer all questions openly and honestly.

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Innovation may be defined as finding ways to enhance competitiveness by converting ideas, processes, technologies and alliances into commercially valuable outcomes. Innovations can come in many forms. This survey is seeking to better understand your thinking about innovation and the strategic decision making that is associated with this.

The Nature of Innovation Within Your Firm

184

Appendices

Appendices

A. Your Market Index

B. Your Innovation Index

185

186

C. Your Resources Index

D. Your Strategy Index

Appendices

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E. Assessing Your Innovation RENT The following section is designed to assess the overall RENT associated with your innovation. Copy each of the scores recorded at the bottom of the previous sections, i.e. Questions 12 through 19. RENT is a function of three elements: Where:

RENT = VOLUME ´ RATE ´ LENGTH

VOLUME = the total volume of sales generated by the innovation RATE = the rate of profits generated by the innovation LENGTH = the length of time over which the innovation generates sales Calculating Your RENT Score

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Your Typology of RENT Innovation Configurations Champion: Shrimp:

Gadget:

Joker:

Flash in the pan: Type A (low rate) Type B (high rate) Oasis: Type A (low rate) Type B (high rate)

[High levels of volume, rate and length] The most attractive innovation type offering high RENT. [Low levels of volume, rate and length] A configuration offering low rent potential due to its modest levels of volume, rate and length. As such, it is unlikely to be of much interest. [Low volume, high rate, low length] A configuration offering low volume and length but high rate, leading to little interest overall. Such a configuration would not justify significant investment. [High volume, low rate, high length] A configuration with high volume and length but low rate, making it little better than the ‘gadget’ despite its apparently attractiveness. [High volume, high or low rate, low length] A configuration with good volume but poor length and may experience both high or low rate, making it challenging for the investor that may need to outlay substantial capital to secure the return over the short lifecycle. [Low volume, high or low rate, high length] A configuration that offers good length but low volume and high or low rate.

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F. Diagnosing Your Innovation Diamond Copy each of the scores recorded at the bottom of each of the previous sections – from Questions 16–19 – onto the ‘innovation diagnostic diamond’. Having completed this, you should examine the findings by reading the following sub-sections: Market index:

Market analysis and development is critical to the successful commercialisation of a new innovation. It requires a careful assessment of customer needs and how the new innovation offers customers value for money. Pricing strategies and the ease with which the customer can understand the new idea and adapt it to their existing systems are critical. Customers will often like to trial a new innovation prior to adoption and assess its value post adoption. Many customers will collaborate with innovators, assisting its commercialisation process.

How was your score? If you scored below 5 on the M-score, you should consider taking urgent action to improve your market assessment. In the space below, write down the top three market issues facing your business. 1. ______________________________________________________

2. ______________________________________________________

3. ______________________________________________________

Innovation index:

Innovation management requires a formal process focusing on new product development and the recognition that innovation is a key aspect of the firm’s success. Commercialisation requires the development of a workable prototype that can be taken to market, and the protection of the intellectual property (IP) associated with the innovation. Legal protection (e.g. patents, trademarks) is important in securing the value of the IP. Customers and employees can be a valuable source of new ideas for innovation and can assist in the development of innovations.

How was your score? If you scored below 5 on the I-score, you should consider taking urgent action to improve your innovation management. In the space below, write down the top three innovation management problems facing your business. 1. ______________________________________________________

2. ______________________________________________________

3. ______________________________________________________

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Commercialisation requires resources of a technological, human, financial and managerial nature. You will need to have adequate technological resources to build the prototype, and the competencies to take it to market. An assessment of the expertise, staffing, and physical and financial resources needed for the commercialisation process should be undertaken. Sources of external funding such as government R&D grants and venture capital financing need to be explored and secured. A well-constructed board of directors who can provide advice and guidance should be identified.

How was your score? If you scored below 5 on the R-score, you should consider taking urgent action to improve your resources for innovation. In the space below, write down the top three resource problems facing your business. 1. ______________________________________________________

2. ______________________________________________________

3. ______________________________________________________

Strategy index:

Strategic planning is critical to the success of commercialisations. A formal written business plan is an effective way to organise the process of strategic management and will be valuable when seeking future external support. This plan should assess the power of customers, suppliers and competitors within the markets targeted by the new innovation. Where the firm can secure collaborative agreements with complimentary actors, it should. The impact of such things as government regulation, compliance requirements and other threats should be examined. A key part of the plan should be the development of a comprehensive financial model for the innovation, assessing return on investment and profitability.

How was your score? If you scored below 5 on the S-score, you should consider taking urgent action to improve your strategy and planning activities. In the space below, write down the top three strategic planning problems facing your business. 1. ______________________________________________________

2. ______________________________________________________

3. ______________________________________________________

G. Blueprinting Your Future What are the main things that you feel you should do to enhance your business model and the opportunities of your innovation? Prepare a dot point list of the key things that you should do.

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 ppendix C – Work Book: Action Learning Project A in Commercialisation Tim Mazzarol and Sophie Reboud © Copyright, T Mazzarol & S Reboud 2019. All rights reserved. Materials are made available for educational use by students, teaching staff and researchers with appropriate recognition to the authors. No commercial gain may be made from the materials presented here without the express written permission of the authors.

Introduction The materials outlined in this Appendix provide a structure and supporting tools that can be used to undertake an analysis of a live commercialisation project. They have been used in post-graduate commercialisation programs at the University of Western Australia with success since 2005. This has involved managers from small and large firms, as well as university researchers, working on NPD commercialisation projects within the university’s master’s programs collaborating with the students to address the tasks outlined below. Additional supporting material can be provided as required by contacting [email protected].  he Action Learning Approach T The action learning approach recognises the importance of embedding the learning into practice, and the need to recognise the existing knowledge and experience that the learner-manager brings to the program. Most managers, particularly those who own and operate their own business, regardless of their formal management education, have in-depth experience of running their companies in a successful manner. This pre-existing knowledge and competence need to be respected and used within the program to enhance peer-group learning and knowledge exchange. Developed by Revans (1971, 1980, 2011), action learning aims to apply learning to addressing practical problems for which there may not be a standard textbook solution. Action learning is founded on five key stages that are illustrated in Fig. 1.

Fig. 1  Key stages of action learning. (Source: Developed from Revans 2011)

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As Revans (2011) explains, the action learning approach follows the scientific method philosophy of approaching any complex and uncertain problem with an open mind and initially observing and studying the available data. In the second stage the project team should formulate theories and perhaps more precise hypotheses about the cause-effect relationships and possible solutions to the problem or task being addressed. In the third stage, the team should carry out activities to test or experiment to help validate or refute their hypotheses and theories. Following the outcome from this experimentation the next stage is to undertake an audit or review of the findings from these experiments and objectively analyse the data. Here it is important to get objective views based on evidence not opinion. Finally, the project team should review and control by rejecting, changing or accepting their theories about what casual relationships exist and how future management decisions should be made. Then the process repeats. This learning approach is consistent with absorptive capacity and the SIMPLEX process outlined in Chaps. 3, 4 and 8 of the textbook. The action learning process provides: • The opportunity to engage with real-life problems and stimulate more purposeful learning; • A learning environment and experience that is both social and individual in nature, and • An opportunity to generate new ideas, theories and solutions from existing knowledge (Rae and Carswell 2001).

Recruiting the Project This project should commence with the identification of an innovation project owner who is willing to work with you on this process. Such project owners can be individual inventors, start-up entrepreneurs, established small and medium size business owners who have new products they are working on commercialising, or even NPD project teams from within larger established firms. They should be approached and the nature of the project explained. Then a number of initial stages should be undertaken. Set up a meeting with them and allow for around 1–2 h. You can meet them at their place of work, but make sure that the meeting place is quiet and sufficiently private so that any confidential issues can be discussed. Bring to the meeting the following things: 1. A copy of the Diagnosing your innovation management questionnaire in Appendix B; 2. A non-disclosure agreement that explains that you will only be using the information for educational purposes and that any information disclosed by the project owner to you will be treated in strict confidence. This should be signed by both you and the project owner. You may wish to give them a copy. 3. A note book and an audio recording device for the meeting, but make sure that you get permission to record the meeting and treat this with strict confidentiality.

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Prior to the meeting you should search online to see if they have a company website, and get some understanding of their organisation’s products, size, structure and past experience with commercialisation if this can be found. Also, ask the project owner prior to the meeting, to bring with them, or have available, any information they are willing to share on their innovation. This can include product brochures, samples of the product, presentations they have made available on their project for sales or venture capital raising activities. Explain that you will be analysing the data from the interview and then meeting with them to undertake some action learning tasks that will hopefully help them with their commercialisation project and strategy development. Conducting the Initial Interview It is important to make the person who you are interviewing comfortable and a good way to start is to get them to talk about their own background and how their project emerged. Some initial areas for this discussion might be: • Personal and professional history of the project owner; 1. Age, education. 2. Previous work experience, e.g. large or small firms. 3. Past experience of new venture creation and/or innovation commercialisation. • History of the company if there is an incorporated entity involved; 1. Years in operation. 2. Employment, e.g. number of employees and any increase or decrease over past 3 years. 3. Gross annual turnover of the business, and any changes over the past 3 years. • Perceptions of how easy or hard they feel it is to be an entrepreneurial manager trying to commercialise a new product or technology. Here you might ask them about: 1. Ease of finding employees with the necessary skills and education. 2. The overall cost of doing business in comparison to other countries. 3. Any problems with geographic distance to key markets (e.g. if they export). 4. How easy they feel it is to raise financial capital (e.g. via venture capital or equity) to fund future growth. 5. The ease or difficulty in recruiting high quality managerial staff to work within their business. 6. The ease or difficulty in accessing high quality R&D centres (e.g. universities). 7. The level of government support to innovators (e.g. R&D grants, tax concessions, export assistance). 8. The laws and regulations that might influence their project (e.g. IP rights laws, taxation, corporate governance rules). 9. Infrastructure and communications (e.g. road, air, sea transport, telecommunications).

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 ssessing the Project – The Innovation Diagnostic Report A Once you completed the interview, take your notes and the completed Innovation Diagnostic questionnaire (see Appendix B), and prepare a report for your project owner. There are two key areas that need to be examined from the data collected in the interview and the questionnaire. The first is the innovation RENT typology and the second is the innovation diagnostic diamond. Assessing the Innovation RENT As noted in Appendix B, there are eight potential types of innovation, each with different levels of potential sales volume, profit margin rate, and innovation lifecycle length. Each of these is determined by several factors that need to be examined as they typically represent the project owner’s ‘best guess’ or optimistic hope of what they expect will happen when their innovation is launched. These assumptions are not always well founded and your task should be to critically and objectively examine these expectations. An import items to focus on within the questionnaire are: • Question 3, which asks whether the innovation works alone or integrates into a system. • Question 4, which asks whether the innovation will substitute for an existing product, or create a new market. An innovation that is able to work alone is isolated, while one that integrates into a system is systematic. This initial dichotomy may be difficult for some project owners to assess, but it is important, as is the issue of whether the innovation is to substitute within an existing market, or try to create a new market. For example, in relation to the different innovation RENT configurations the following issues are likely to apply. Shrimp

The Shrimp innovation has low or modest potential sales volumes, profit margin and length of lifecycle. It is therefore usually an incremental innovation that can be readily developed by an SME without significant risk or outside support. Considerations here are: • Isolated within either a new or existing market – it might be worthwhile proceeding with autonomous development if the returns to any investment are considered sufficient to justify the expenditure. There may not be much opportunity for formal IP rights protection, and even if there were, it might not be worth the cost. • Systemic within an existing market – due to the nature of the Shrimp, it may be difficult to secure entry into the market unless there are existing key network members who are willing to help support its adoption. Only rudimentary IP rights protection is likely to be necessary.

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• Systemic within a new market – this may be too difficult and also unrewarding given the potential cost for the modest return and lifecycle. Withdrawal or abandonment of the project may be wise. Gadget

The Gadget innovation has low or modest potential sales volumes and length of lifecycle, but an above average rate of profit. It is therefore attractive where it can be quickly commercialised Examples of this are software apps that meet specific niche market needs where the buyer is willing to pay a premium for at least a period of time. Considerations here are: • Isolated within either a new or existing market – this set of conditions offers a good opportunity for an autonomous development, but one that might be suitable for a partnership if this can add value. IP rights protections would be highly desirable, but carefully planned due to the short lifecycle. • Systemic within an existing or new market – this might be a challenge for a strategic partnership given the short lifecycle and modest sales volume. Rapid commercialisation will be essential and this could prove difficult if network partners are too slow or demanding on the technology. Limited IP rights protection might be best, given the short lifecycle. Oasis (Types A & B)

The Oasis innovation has low or modest potential sales volumes a long lifecycle, but either a low or modest rate of profit (Oasis A), or a high rate of profit (Oasis B). The decision to proceed with commercialisation may depend on whether it is a type A or B configuration. This is not to suggest that the Oasis A should be abandoned, but given the long lifecycle, the more profitable Oasis B is potentially more attractive. Considerations here are: • Isolated within either a new or existing market – this is an ideal configuration for an Oasis, particularly the high rate (profit) type B, with potential for autonomous development. However, if profit is high, a partnership might be beneficial if this can add value. IP rights should be protected due to the long lifecycle. • Systemic within an existing or new market – this is an ideal configuration for a partnership development. Whether to lead or follow in this partnership will be an important strategic consideration. This will be dependent on how dependent the firm is on partners. Due to the long lifecycle, protection of IP rights is very important. Flash-in-the-Pan (Types A & B)

The Flash-in-the-Pan innovation has a potentially high sales volume, but a short lifecycle, and may offer either a low or modest rate of profit (Flash-in-the-Pan A), or a high rate of profit (Flash-in-the-pan B). The decision to proceed with commercialisation may depend on whether it is a type A or B configuration. This is not to suggest that the Type A should be abandoned, but given the short lifecycle, the more

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profitable Type B is potentially more attractive if it is to return any investment from a relatively low sales volume. Considerations here are: • Isolated within an existing market – commercialisation may be risky due to the short lifecycle. A trade sale of the technology might be a better option if a suitable buyer can be found. IP rights protection will be valuable to assist with any trade sale. • Isolated within either a new market – for small firms, an autonomous start to help achieve proof-of-concept then either a partnership, trade sale or licensing strategy. This will be more attractive if it is the high profit Type B. IP rights will be important if licensing or trade sale. However, short lifecycle will need to be considered. • Systemic within an existing market – this may be very difficult for an SME due to the large market diffusion required and the relatively short lifecycle. This will require support from incumbent network partners, and might be possible if the innovation is a higher profit Type B. However, the project team should assess the technical and market risk and if strong alliance partners are not able to provide support, the best option may be to delegate the project to another firm via licencing or trade sale. This will require formal IP rights protections and the cost of this should be factored into any development strategy. • Systemic within a new market – this situation may be approached via a strategic partnership so that the innovation can be diffused within a niche market. If the innovation is a Type B, with good profitability, it may be an attractive alliance partnership (e.g. joint venture), or licencing opportunity for a larger firm. This will require a formal IP rights protection strategy and the cost of this will need to be assessed against any potential returns. Joker

The Joker innovation has a high sales volume and long lifecycle, but only a low or modest rate of profit. It can be a worthwhile innovation to proceed with, but its commercialisation depends on the relative ease with which it can be brought to market and sustained give that the profit margin is not high. Such innovations can work if there are sufficient process innovations to help keep production and distribution costs down, thereby not placing too much pressure on profit margin. In fact, many Joker innovations are actually technological process innovations. Considerations here are: • Isolated within an existing market – commercialisation may be risky due to the low profitability. However, as noted above, if the innovation is more a process than a product, it may be acceptable to proceed with commercialisation. If IP rights can be secured across a broad geographical diffusion, they can provide the foundation for licensing opportunities. • Isolated within either a new market – in this case, particularly for SMEs, it may be best to start the commercialisation process alone, or in partnership if a suitable

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relationship can be found, and get the innovation through the proof of concept stage. At this point the opportunity to either licence or trade sale the innovation can be explored if future internal growth is too difficult. It will be important to have strong IP rights protections in place. • Systemic within an existing market – this may be very difficult for an SME due to the large market diffusion required and the relatively thin profit margin. If there are suitable buyers, perhaps larger firms, within the market network, a trade sale may be a good strategy. Once again, strong IP rights protections will assist with the trade sale value. • Systemic within a new market – for a small firm, this situation should probably be approached via a strategic partnership from as early as possible, to assist with proof of concept, and securing access into the target market. Over the longer term, a licensing or trade sale to the larger firm partner might be an opportunity. This will require a formal IP rights protection strategy and the cost of this will need to be assessed against any potential returns. Champion

The Champion innovation has a high sales volume, rate of profit and length of lifecycle, making it potentially very attractive as a commercialisation project. Nevertheless, the typical Champion innovation has a global market potential, and as such it will require significant resources for the full commercialisation process to succeed. This may pose a challenge to small firms. Considerations here are: • Isolated within an existing market  – as noted above, commercialisation of a Champion innovation, which is by nature, disruptive, will pose substantial challenges to an SME.  The decision to proceed will depend on the project team ascertaining if they can realistically mange the project. If not, they may have to consider licensing or trade sale. This will require strong IP rights protections across a wide geographical area. • Isolated within either a new market – for small firms, an autonomous start to help achieve proof-of-concept then either a partnership, trade sale or licensing strategy. Strong IP rights protections will also be very important and across a wide geographic area. • Systemic within an existing market – this may be very difficult for an SME due to the large market diffusion required even given the relatively high profit margin. If this is the case, the project team should consider either delegation via licensing, or trade sale to a larger, complementary firm. This will require strong IP rights protections across a wide geographical area. • Systemic within a new market – this situation may be approached via a strategic partnership so that the innovation can be diffused within a niche market. The opportunities for licensing and trade sale This will require a formal IP rights protection strategy and the cost of this will need to be assessed against any potential returns.

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Assessing Other Aspects of the Innovation RENT Configuration It should be noted that each of these eight innovation RENT typologies is only perception of potential rent as viewed by the project owner. Various factors can be adjusted to change the configuration of the innovation. For example, close engagement with the customer / end-user via voice of the customer (VOC) research can help to generate sufficient value added to a product that profitability, lifecycle and market sales potential can be increased. Attention should be given to the responses that were provided by the project owner to questions 7–15 within the diagnostic survey (see Appendix B). It is importance to understand fully why these particular answers have been given, how reliable they are and whether they are based on solid research, or hopeful expectation and “gut feel.” Assessing the Innovation Diagnostic Diamond As noted in Appendix B, the four components of the Innovation Diagnostic Diamond (IDD) provide a foundation to assess how well the firm is structured and resourced to proceed with the commercialisation. Each item in the IDD should be examined, along with the comments made by the project owner during the interview in relation to each of these four indices. In relation to the four indices of the IDD, an international study of 567 innovator SMEs, from 11 OECD countries, all of which were engaged in the commercialisation of a technological product and/or process was undertaken (Mazzarol and Reboud 2011). This study involved in-depth, face-to-face interviews using the innovation diagnostic survey as outlined in Appendix B. Of these firms, 51% had successfully commercialised at least one innovation prior to being surveyed. A total of 43% had experience of commercialising more than six in the previous 3 years. The majority (72%) of these innovations were new products, a further 16% were technological process innovations. These same firms invested an average of 22% of their annual turnover into R&D. As shown in Table  1, the most common type of innovation these firms were working on was a Champion, with no statistically significant differences found in relation to the size of the firm, the industry it was operating in, the country it was located in, or the type of innovation characteristics (e.g. isolated, systemic, new or established markets) (Mazzarol and Reboud 2011). The following sub-sections review the findings from the IDD. IDD Market Index

The market index of the IDD is illustrated in Fig. 2, which represents a box plot diagram. The IDD was measured on a 5-point scale and the box plot shows the results for each of the ten question items in the index. The thicker ‘box’ within each item represents the concentration of 50% of all the responses to that question. Within the box is a thicker line that shows the mean (average) point for the group response. The thinner “whiskers” that extend out from the ‘box’ comprise the remaining 50% of responses and the standard deviation of the responses is represented by the overall length of the box plot including the ‘box’ and the ‘whiskers.’ Outlier cases are represented by small circular dots.

Appendices Table 1  Innovation RENT configuration typologies – 567 SMEs across 11 OECD countries

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Innovation type Shrimp Gadget Flash-in-the-Pan (type A) Flash-in-the-Pan (type B) Joker Oasis (type A) Oasis (type B) Champion

Proportion of sample (n = 567) 11.6% 5.5% 7.8% 9.2% 9.3% 7.8% 10.1% 38.8%

Source: Mazzarol and Reboud (2011)

Fig. 2  The IDD Market Index. (Source: Mazzarol and Reboud 2011)

From Fig. 2, it can be seen that the majority of respondents were confident that they had lead customers already in place, ready to adopt their innovation. The majority were also confident that they had fully explored the opportunities that their innovation offered to customers. Further, the majority also felt that it was compatible with their lead customers’ existing technologies and systems. However, there was much less consensus over things such as: • • • • •

Whether they had fully examined the customers’ perceptions of risk and cost; If the customer could do post adoption tests and evaluations; How easily the customer will understand the new technology; If they had the most appropriate pricing strategy in place; and Whether they had fully researched the benefits as perceived by the customer to allow them to generate a CVP.

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There was also a significant level of variance across the sample in relation to whether they had worked with lead customers over the NPD process, and how easily customers could do pre-adoption test and evaluations. What this data indicates is that most SMEs, when engaging in NPD commercialisation, even those with a good deal of past experience, don’t undertake a systematic VOC customer discovery and development process. The proximity effect of having a potential lead customer apparently showing interest in adopting the innovation, and having met or addressed any potential issues over meeting compatibility with the customer’s existing systems, appears to override a more considered market assessment. It is important, when reviewing the IDD index, across all four measures, that you review each item and discuss the results from the survey and what they mean in relation to the future commercialisation of the innovation your project owner is trying to undertake. An important issue is possessing the necessary resources and competencies. As discussed in Chap. 11 of the textbook, the SME engaged in commercialisation will need to assess if they have the necessary marketing competencies and skills to enable them to proceed alone, or if they might need to find strategic partners to assist them. IDD Innovation Index

Figure 3 shows the results from the survey of the IDD innovation index. It can be seen that there was strong consensus amongst these firms that they actively involved their employees in the NPD process. As noted above, the majority of firms also had past experience of commercialisation, and there was a major strategic focus within

Fig. 3  The IDD Innovation Index. (Source: Mazzarol and Reboud 2011)

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these firms on innovation. However, here was significantly less agreement over a range of important issues relevant to the NPD process and commercialisation: • • • • • • •

The active involvement of customers in the NPD process; The use of confidentiality agreements prior to showing new ideas to others; Possession of patents or patents pending; Discussions with lawyers or patent attorneys over IP rights protections; Independent testing of new technologies; The ability to develop a prototype alone; Possession of a formal NPD process.

These findings are fairly typical of most small firms that engage in commercialisation, even those that have past experience with this and a strong focus on innovation as a strategic issue. The pattern that emerges from these findings shows the relatively informal approach to NPD and commercialisation amongst SMEs. As a result, you should not be surprised to find that many of the projects you might encounter in this action learning tasks, if they are owned by SMEs, will have a similar profile. Your challenge will be to help the project owners to improve the way they deal with these issues. IDD Resource Index

The findings from the IDD resource index are illustrated in Fig. 4. It can be seen that most of the firms who were surveyed felt confident that they could find external expert assistance if required, and that they already had the technological resources

Fig. 4  The IDD Resource Index. (Source: Mazzarol and Reboud 2011)

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required to create a prototype. However, there was significantly less agreement over many of the other items that were examined in the resources area. Particular areas of divergence were: • Identification of potential venture capital investors to assist with financing the commercialisation; • Having fully explored all the possible support they might get from government programs; • Having adequate financial resources to develop their idea through the commercialisation process; • Having the physical and staffing resources required; • Having an experience NPD project team to work in the idea; • Having all the necessary competencies to fully commercialise the innovation alone. As discussed in Chap. 5 of the textbook, a common characteristic of an SME is that it lacks resources, and this is clearly reflected in these findings. The lack of attention to identifying sources of venture financing or government support are also worth noting. Given that most of these firms indicated that they didn’t have the financial or staffing resources to fully commercialise their innovation, their concurrently lack of interest in securing third party investors or leveraging government funding or other support for commercialisation suggests that many were somewhat insular in their thinking. However, the study also found that many did not wish to secure venture capital funding for their projects, and many did not feel that their governments were providing them with much support (Mazzarol and Reboud 2011). IDD Strategy Index

The last of the four IDD indices is the strategy index. Figure 5 shows the results from the survey of SMEs in relation to these questions. It can be seen that in comparison with the other three indices, there was much less consensus over these issues. The standard deviations were generally much larger on most items suggesting that these small, innovator firms, were not particularly well organised in relation to their commercialisation strategies. Some issues worth noting: • Many had not completed a comprehensive financial model for their innovation. • There was some equivocation as to whether or not they had undertaken a risk assessment. • There was a high degree of equivocation in relation to whether or not they had fully assessed the reaction of complementary actors that might collaborate with them. • While around half the respondents indicated that they had taken action to secure any necessary compliances and authorisations, a high proportion had not really given much attention to existing or anticipated changes to government regulations.

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Fig. 5  The IDD Strategy Index. (Source: Mazzarol and Reboud 2011)

• There was more consensus over their assessment of competitor reactions, threats of alternative technologies, or supplier and customer power. However, the results did not suggest this work was fully completed. • Finally, there was a large proportion of firms that did not have a formal, written business plan for the innovation. These findings reflect the relative informality that typically defines the SME. This is therefore not surprising. However, if such firms wish to actively pursue the commercialisation of innovation as a key strategic priority, and if they need to form strategic partnerships to secure access to resources and competencies they don’t possess, but need to complete their projects, it would seem sensible and necessary for them to enhance the formality of their strategic planning process. Discussing the Findings from the Innovation Diagnostic Report with the Project Owner When undertaking this action learning process, it is important that you engage with the project owners, to clarify their responses in the innovation diagnostic report, benchmark them against the findings outlined above, and make sure that they personally reflect on their own responses. Sections E, F and G of Appendix B are important areas to focus on during your interview with the project owner, and during any subsequent discussions. The following sections outline the action learning task and provide some potentially useful tools for you to work with your project owner as you undertake the task.

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 ction Learning Task 1: Assessing the Strategy and Market Case A The purpose of this action learning task is to assess the innovation strategy and market assumptions underlying the business model of the company you are working with on the innovation project. This is the first of a two-part group project that will draw together your assessment of the firm’s business model and its effectiveness for the commercialisation of the innovation. Requirements Working in groups and using the industry partner plus the unit workshop notes and other relevant readings and information prepare the following: 1. A critical assessment of the innovation project you are working on with specific reference to the Innovation Diagnostic Report and, the “anticipated rent” forecast. Is this realistic and if so, what are the implications for the future commercialisation strategy to be followed by the company? Also examine the results of the Innovation Diagnostic Diamond (IDD). Consider the findings from the “Strategy Index” and “Market Index”. What are the key areas of weakness and what does this mean for the future commercialisation of the innovation? 2. A preliminary business model analysis using the “Lean Canvas” framework. Consider each of the nine areas within the framework and try to clearly identify what are the areas that in need of further work or where there are major gaps in the firm’s knowledge or information. Prepare a list of “Business Model Hypotheses” relating to things such as: i) market size; ii) product vision; iii) product features and benefits; iv) customer segments; v) channels; vi) market type; vii) customer relationships; viii) key resources and ix) key processes. 3. A Customer Archetype should be developed that examines the customers’ needs, both known and unrecognised. Then an assessment of how to reach this customer archetype and how to validate this customer archetype for the business model considering the product/market fit, scalability and whether the innovation is or can be offered as a Minimum Viable Product (MVP). 4. A Business Growth Engine analysis should be developed that seeks to classify the current business model being followed by the company against one of the business growth engines described in the Lean Start-Up process. Once this has been identified, you should critically assess whether you think this is an appropriate business growth engine for this innovation.

 eveloping the Business Model – A Check List D Developed originally by Grupp and Maital (2001), the following is a list of questions with accompanying comments that should be answered in the preparation of a business model. These issues include an assessment of both the market and the customer; determining the scope of the firm’s operations and the way it offers value to the customer via a clear point of differentiation. The business model is much wider than the product, which is only a relatively small part of the entire package. Other key elements that will need to be considered are the way the business will be organised, how this business will take its product to market and the systems that will

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be put in place to make it work. The following sections of this document examine these issues and comprise a check list for you to consider when blueprinting a sound and sustainable business model. It can be used in conjunction with the Lean Canvas template. Assessing the Customer and the Market In assessing the customer and market for the innovation the following questions should be answered (Tables 2 and 3):

Table 2  Customer selection process Key questions: 1. Which customers do you wish to serve with your innovation? 2. What do you know about them and will they be a good long-term partner for you? 3. How will this customer segment be better served by your innovation than existing technologies? 4. Will this customer be willing to pay a premium for your innovation? 5. Is there a “customers-customer” or end-user that you must consider and satisfy before your customer will be willing to purchase your innovation? 6. Where is this customer located and how easy is it for you to reach them?

Considerations: You should select your first customer carefully to ensure that you get your innovation adopted by a prominent early adopter who will provide you with access to wider market access. Review existing technologies used by the target customer and examine their weaknesses & strengths. Also look at the prices paid for these existing products and whether you can get a better price to create more margins. If the end user is not the same as the customer you will need to ensure that you look closely at both to achieve market penetration.

Table 3  Customer behaviour and market change Key questions: How are customers’ demographics and psychographics (e.g. values, attitudes & lifestyles) changing?

What are the priorities that customers or end-users of your innovation in relation to their needs that are likely to be satisfied by the innovation? What is their buying behaviour and track record in the adoption of new products or services? What are the key drivers of profit within the market segments you are seeking to service? Will these conditions continue into the future?

Considerations: It is important to get market research data on the target customers whether they are people or firms. This data should provide information on their characteristics and also how they use such technology or how such technology can offer them solutions. You should find out how these customers buy and how willing they are to adopt new ideas.

You should find out what drives the customer to pay for products and the factors that influence their spending on new technologies.

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Assessing Differentiation and Value In assessing the differentiation of the innovation and the value that it can offer customers the following questions should be answered (Tables 4 and 5). Determining the Scope of Operations In assessing the scope of the firm’s operations, the following questions should be answered (Table 6). Go to Market Mechanism In assessing the way in which the firm will seek to sell into its target market the following questions should be answered (Table 7). Building the Venture Team In assessing the team that will manage the firm’s innovation the following questions should be answered (Tables 8 and 9). Operations Management In assessing the how the firm will manage its operations the following questions should be answered (Tables 10 and 11). Financial Issues In assessing the how the firm will deal with financials the following questions should be answered (Tables 12, 13 and 14).

Developing the Market Strategy – A Check List Customer Needs In the space below write down the key needs that customers are likely to have in relation to the new product. Consider: (i) basic needs (what the customer assumes the product will do); (ii) spoken needs (what they say they want the new product to do); (iii) unspoken needs (things that might delight them if provided). List as many as you can in the space provided and mark them B (basic), S (spoken), and U (unspoken) needs, then try to rank them in order of priority from the customer’s perspective (where 1 = most important). Under “BEST FIT” try to indicate with an X the needs that your product is able to satisfy best (Table 15). Market Segmentation Based on the findings from your customer needs analysis can you identify any customer/market segments that the product is most likely best placed to serve? Prepare a brief profile of the target customer listing any demographic, geographic or psychographic variables that help to define them. You may wish to review Chap. 10 of the textbook (see Fig. 10.3).

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Table 4  Differentiation of the innovation Key questions: What is the basis for your differentiation? What is your unique value proposition for your target customers? Why should the customer want to buy from you? Will customers be able to understand, test and trial your innovation prior to purchase and will they be able to undertake? Can your innovation substitute an existing product or would it create a new market? Is your innovation compatible with existing products and process or does it create a new dominant design or new system?

Considerations: You should clearly define the things that make your innovation unique from competitor offers and how these features can create a clear offer to customers as to what your value is. It is important to know why the customer might want to buy from you and to allow customers a chance to test or trial your innovation prior to purchase which has been found an important issue in achieving adoption. Radical innovations are often less likely to be adopted than incremental ones that fit into existing customer systems and can be less disruptive to customer behaviour.

Table 5  Competition issues Key questions: Who are your key competitors today? Who will be your key competitors in 1–5 years’ time? How convincing is your differentiation relative to that of your key competitors?

Considerations: You should have a clear understanding of who your key competitors are and what makes them stronger or weaker than you. If you feel you have an advantage you will need to assess if they might respond and erode your edge.

Table 6  Operations scoping issues Key questions: Does your innovation offer a platform that can offer a wide range of new products and services able to target a large number of new markets? Which products allow you to best match market opportunity with your firm’s core competencies (e.g. the things that you are best able to do)? Can you do all the work required for commercialisation yourself or do you need to sub-contract or form alliances to achieve your goals? If you do need to form alliances or subcontract, what are the key activities that you should keep to yourself and which ones can you outsource?

Considerations: Your innovation should not be a ‘one trick pony’ that has only a limited target market.

You should seek to target markets that allow you to best match your firm’s knowledge and skills to their requirements. Unless you have all the resources and skills you need to fully commercialise the innovation you will probably need to form alliances with other organisations. These need to be treated as of strategic importance and selected with care.

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208 Table 7  Go to market issues Key questions: Will you seek to sell direct, use agents, franchise or licence the innovation? Will the customer pay you directly or indirectly and is this a problem? How frequently will customers pay you and will this provide sufficient cash flow? Will your business secure repeat customers as part of its business model?

Considerations: It is important to decide how you will take the innovation to market and whether you will seek to sell directly or deal via third parties. Licensing your innovation is often easier than selling directly but will be less likely to generate high returns. However, marketing and selling costs are usually very substantial.

Table 8  Team composition Key questions: Who will make up the team to manage your venture?  1. What is their past experience in similar ventures?  2. What is their technical education & skills?  3. Do they work well in a team & have integrity? What is each team member’s knowledge of?  1. The innovation or derived products & services?  2. The process of producing these products & services?  3. The marketing of such products & services?  4. The dynamics of working in an innovative venture?

Considerations: Who is in the team is actually a more important issue than the innovation itself? You should ensure that there is a well-balanced team with a good cross-section of skills in the key areas of technology, marketing & sales, finance, personnel, operations, planning and legal. All team members should “get on well” and have a sound knowledge of the overall picture of the firm and its innovation.

Table 9  Team support networks and corporate governance Key questions: Who can the team call upon for legal advice?

Is there a competent taxation and accounting advisor? Where will the team go for specialist marketing advice? Is there a source of external financing if required? Describe the corporate governance structure for your firm. Who will form the firm’s board of governance? How will shareholder equity be structured? What is the dividend or reinvestment policy? What is the exit strategy for shareholders?

Considerations: Most firms lack all the specialist skills they need to fully commercialise a new product. A network of business advisors & potential sources of venture financing should be found. A Board of Directors should be appointed with an independent chairperson who is not identical to the CEO. Share ownership should be clear and there should be a formal share register within the firm’s deeds of incorporation. How this equity will be shared and how a shareholder will exit the venture needs to be agreed.

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Table 10  The purchasing system Key questions: How will you deal with key suppliers? Can key suppliers be integrated into operations? How can effective use be made of supply chain management systems?

Considerations: Key suppliers should be viewed as long term partners who can assist with your innovation process and become valuable allies. Using e-commerce systems can be a way of lowering transaction costs.

Table 11  R&D and NPD activities Key questions: Should R&D be outsourced? What can or needs to be developed collaboratively? How much should be spent on R&D? Will R&D teams be integrated with marketing, finance and other functions? How can R&D be linked to marketing and market research? What mechanisms do you have to ensure that R&D projects will be completed on time? What metrics will be used to ensure R&D projects are assessed? Is there a new product development road map in place?

Considerations: It is important to decide if you can develop the innovation alone or if it requires a joint effort. Finding a partner is a major strategic issue. You should ensure that the technical side of the product development process is run in parallel with the marketing side. An NPD road map defines how you plan to take the innovation to market and points of GO/KILL that can be identified along with budget estimates and other relevant metrics.

Table 12  Cost-profit-volume issues Key questions: What will be the final price you can secure for this innovation? What will be the gross profit margin once variable or selling costs are deducted? What is the break-even for your business given estimated fixed costs? Do forecast sales make the business case attractive?

Considerations: You should calculate the profitability of your venture with a realistic assessment of the number of sales that will be needed to allow the business to break-even given its anticipated overhead costs.

Table 13  Capital investment issues Key questions: Will capital investment and capital intensity levels be high? Will automated systems allow you to reduce the level of staff?

Considerations: High capital investments will risk raising the break-even level and may require you to secure external funding. Employees can raise fixed costs and the break-even levels. Staffing issues also put pressure on the management team.

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210 Table 14  Production costs Key questions: How many costs can be moved from fixed to variable? Is sub-contracting a means of achieving this? Do you need to purchase state-of-art systems or will 90% be OK?

Considerations: If you can shift costs from fixed to variable the break-even point for your firm will fall and the business model will be dynamic in nature. Sub-contracting or outsourcing will offer a chance to achieve variable costs but you will need to ensure that this does not risk loss of control or quality. High sunk costs may risk raising your break-even levels.

Table 15  Customer needs analysis Customer needs: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Type of need:

Priority:

Best fit:

Key Competitors Take the top 5–10 customer needs from the previous table and list them on the table below. Then rate your new product or technology against the leading existing product or technology currently in use. Rate your product against the current leading competitor product from the customer’s perspective as being either: worse, same or better than the competitor in relation to each benefit (Table 16). In Table 17, list the strengths and weaknesses of the product or technology in relation to the key competitor product or technology currently in use within the target market.

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Table 16  Top benefits to customer Worse

Customer benefits (from Table 15) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Same

Better

Table 17  Top benefits to customer strengths and weaknesses Key strengths 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Key weaknesses 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Table 18  Top potential threats and opportunities Key threats 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Key opportunities 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

In Table 18, list the key threats (from competitors, substitute technologies, regulatory changes) to the new product in the target market and also what you see as the key opportunities for the new product. What additional information do you need to fully assess the customer’s needs and the market potential for the product?

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Prepare a brief list of the things you should do to capture the voice of the customer and make a full assessment of the market for your new product (e.g. market research, product evaluations). Selling into the Market How will the firm sell the product into the target market? You should have a clear strategy for the way the firm will sell its product to the customer. Key considerations for this should be: • Who will do the selling of the product (owner, a sales team or an agent)? • How well are they organised and briefed to sell the benefits or unique features of the product and project the company image? (consider sales support tools e.g. brochures, prototypes) • Is there a well-considered customer targeting and approach strategy? (e.g. use of data bases, market research, lead generation and sales presentation). • What will be the minimum sales targets at a market entry price to achieve break even? Prepare a brief description of your selling-in strategy. Employing the Marketing Mix The following section provides an initial outline of a marketing strategy using the marketing mix framework as a guide. Try to address each question/issue in brief but relevant detail. Pricing Strategy

Describe your pricing policy: e.g. premium price (market skimming) or low price (market penetration) and how this will assist in generation of high sales volume and good profit margins. How will you justify a premium pricing strategy if followed? Promotion Strategy

Describe your promotional strategy with consideration given to any advertising, use of websites, publicity, participation in trade shows, entry to competitions and the development of a brand name for the product. Distribution Strategy

Describe your distribution strategy with consideration given to how you will get the product into the hands of the end user. Will you seek to deliver direct to the customer, will you supply to intermediaries who will on-sell to the end user? How will you control the quality of the product as it moves through the distribution channel and what will be your approach to after sales service and support?

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Physical Evidence – Image Management Strategy

Describe how you will control your company and product image to ensure that it looks and feels like a top-quality item. You might consider product re-design, packaging, and corporate/product logos) People and Process Strategy

Describe your strategy for controlling the quality of work undertaken within the firm and the people who will need to be found to assist in taking the product to market. You should consider what use might need to make of specialist consultants such as market researchers, marketing and publicity firms, product designers.

 ction Learning Task 2: Assessing the Resources and Innovation Case A The purpose of this assignment is to assess the innovation strategy of the commercialisation project in relation to the firm’s available resources and the overall strength of their innovation. Having examined their business model strategy and market opportunities, the next phase of this process is to examine the firm’s financial, technical, physical and managerial/staffing resources to see if they are adequate for the future development of the innovation. Also important is whether there are sufficient “isolating mechanisms” (e.g. IP rights protections) to allow the innovation to proceed alone, or be negotiated with third parties if not. Requirements Working in groups and using the industry partner plus the unit workshop notes and other relevant readings and information prepare the following: 1. A critical assessment of the resource and innovation base for the project you are working on with specific reference to the Innovation Diagnostic Report and, the results of the Innovation Diagnostic Diamond (IDD). Consider the findings from the “Resource Index” and “Innovation Index”. What are the key areas of weakness and what does this mean for the future commercialisation of the innovation? 2. An assessment of the need for strategic partnering that determines if the innovation can proceed to commercialisation alone and if not, what strategic partnerships are required and their nature. Draw up a list of the essential strategic partners and describe the “value exchange” that might take place with each. What are the implications for the future development of the innovation? 3. An IP rights portfolio should be developed that identifies all the intellectual property rights that are held by the firm and any third parties and that are considered vital to the future commercialisation of the innovation. What are the implications of this for any future strategic partnerships and equity financing?

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4. A financial value analysis should be developed that examines the financial merits of the innovation. This should examine anticipated sales over at least a 3-year time horizon, how such sales will be generated and the pricing strategy to be followed. This should be matched against the anticipated cost structure of the business model and a cost-profit-volume analysis undertaken. Make recommendations to the partner company as to the implications of this.

 eveloping an IP Strategy – A Check List D Describe the steps you will take to protect your intellectual property. In particular, consider: • NDA and trade secrets; • Patents; and • Trade marks. Also, describe the steps you will take to remedy any potential problems with your IP rights portfolio (Table 19). Table 19  Steps to developing an IP strategy Key steps required 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Key issues that will need to be taken to remedy problems

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Licensing Describe your thoughts about the possibility of licensing or selling your IP, including: • • • •

licensable subject matter; potential licence targets; potential licence values; and potential licence terms

Using IP as a Strategic Advantage Describe how you think your IP can be used to strategic advantage, including: • to create value, e.g., a licensing program, IP asset sale, or participating in a joint venture arrangement • to use as a barrier to entry from competitors IP Rights Concerns Describe any concerns you have in relation to: • infringement by your business of third-party IP. • infringement by third parties of your IP. Describe how you will resolve these issues. Describe how your IP strategy aligns with your existing business strategy.

References Grupp, H., & Maital, S. (2001). Managing new product development and innovation: A microeconomic toolbox. Cheltenham/Northampton: Edward Elgar. Mazzarol, T., & Reboud, S. (2011). Strategic innovation in small firms: An international analysis of innovation and strategic decision making in small to medium sized enterprises. Cheltenham/ Northampton: Edward Elgar Publishing. Rae, D., & Carswell, M. (2001). Toward a conceptual understanding of entrepreneurial learning. Journal of Small Business and Enterprise Development, 8(2), 150–158. Revans, R. W. (1971). Developing effective managers. Harlow: Longman. Revans, R.  W. (1980). Action learning: New techniques for management. London: Blond and Briggs. Revans, R. W. (2011). ABC of action learning. Farnham/Burlington: Gower.