What is the relationship between entrepreneurship and innovation?

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Depending on which model you are looking at entrepreneurship has a differing relationship with innovation. There are definitions out there that make an entrepreneurial behaviour almost identical to that of innovation. Is there more to innovation than being entrepreneurial? Can entrepreneurship be defined by innovation? These are some questions I intend to answer throughout the essay and I will examine and determine how the two are related, however large or small the relationship is. Up to 1 in 3 business start-ups fail within the first three years and with the amount of start ups, 3 per minute in 2001, there is a lot of prospective, hopeful entrepreneurs aiming to succeed in business but fail. What is the difference in characteristics between those that succeed and fail, is there a clear differentiation and can the amount of innovation used by the entrepreneur effect the success of the business? I aim to come to a conclusion and answer all of these questions throughout and critically analyse differing theories.

Both of the terms are often used interchangeably with little understanding of the differentiation between the two (David Johnson, 2001). My interpretation of innovation is that it has a lot to do with the invention of a product or a process and is a change in the norm, which then becomes the norm. A good example which would show innovation would be the movement from the floppy disk to the CD ROM, this is a clear move with a totally different design and then became the norm, till further innovation happened and the USB flash drive has become the most common for file storing and transfer. The question of defining entrepreneurship and linking it to innovation is harder than it sounds. There are many studies of entrepreneurship however there is no specific definition as it cannot be summed up into one single statement. There are various models showing a differing correlation between innovation and entrepreneurship. I see the link between the two as one in which, if worked together in harmony there can be a prefect outcome in terms of the success of an entrepreneur. Not everyone who starts up a business is an entrepreneur; it is the one who makes the best outcome of any opportunity given throughout the life of a business that will be a successful entrepreneur. There are different characteristics and different circumstances surrounding each successful entrepreneur¿½s story but each made it down their route to become successful.

¿½A good idea is nothing more than a tool in the hands of an entrepreneur.¿½(Jeffry Timmons 1977) This idea shows that innovation, or the idea is just one single aspect of the processes of the entrepreneur in the making of, and continuing the success of a business. Therefore this means there is a relationship visible but it cannot be said it is one that says that entrepreneurship is more than just an idea, or innovation but it is using that idea.

¿½Innovations are the composite of two worlds, namely, the technical, and the business; so when only a change in technology is involved, this is just an invention; but as soon as the business world is involved, it becomes an Innovation.¿½ (Schumpeter 1934). ¿½An entrepreneur is an individual who establishes and manages a business for the principle purposes of profit and growth. The entrepreneur is characterised principally by innovative behaviour and will employ strategic management practices in the business this explanation is very relevant to what I am trying to explain and the link with business shows how entrepreneurs in business can be innovative.¿½ (Carland et al, 1984). These are how innovation and entrepreneurship can be defined in 2 different models. They can both be linked into each other visibly due to the idea of business in innovation and the innovative behaviour. However they can also be criticised due to saying entrepreneurs are only in pursuit of profit but this would depend on the personality of the individual. The founder of Oxfam, Joe Mitty, was solely interested in making money for charity and was a volunteer.

Schumpeter¿½s view of ¿½creative destruction¿½ (1934) refers to the entrepreneur introducing a new idea that takes over a market and links entrepreneurs to economic growth and development. This could be an idea of shifting production processes, reducing the size of the workforce to increase productivity or indeed the introduction of a new product. The reason the introduction of the new idea has such an effect is, because of the unpredictability of the introduction, meaning there is no chance to prepare and lessen the impact of the new idea. Therefore Schumpeter¿½s theory was very much in line and the link innovation has with the entrepreneur is clear and represented by the fact that this creative destruction often leads to the overhaul of a market and takes over the old idea. For example the DVD, taking over VHS, and now they do not sell VHS in HMV and most other leading electronic multi media stores.

The view of Kirzner (1973) is that entrepreneurs are individuals that recognise opportunity and find gaps in the market and test the viability of new business by trial and error and feedback from the market. Therefore these two views are contrasting with Kirzner¿½s view of entrepreneurship related more markets and gaps within them, and the responsiveness of an individual to react and make the most of this opportunity, rather than seeing the opportunity for a new product or idea, rather than simply moulding or adapting what is there already to gain market share. After this an entrepreneur differentiates from just an opportunist introduction and realisation of the idea by carrying on the idea and turning it into a viable business.

These two ideas give a different level of linkage with innovation, rather than the destruction of Schumpeter¿½s model which creates the market for the product, Kirzner believes it is about adapting the idea to fit into the market, so the innovation may be seen as more lapse and less extreme in Kirzner¿½s case.

OECD (1998) states that: ¿½(they) accelerate the generation, dissemination and application of innovative ideas¿½ this sums up one particular idea of the relationship between the two; it implies that entrepreneurship is innovative however, innovation is not always entrepreneurial. Innovation may only be one aspect in the beginning, or perhaps innovation should happen throughout and be continued through the life of the business to attempt to keep ahead of competition. Innovation is not always a radical destruction of a current process or product and it can just be a small alteration to current product or process. E.G. Sir Stelios Haji-Ioannou, an entrepreneur and the founder of easy jet, took an idea and used his business mind and talents to create and exploit the market, however did not invent any new innovative product, or production process but he spotted an opportunity for a budget airline which opened air travel up to the masses, whom perhaps could not afford what was there before it.

Schere (1982) sums up an entrepreneur by giving their characteristics, it states they have a tolerance for stress and uncertainty, a real life example here can be the entrepreneur I interviewed, John Russell, who had to support a family at the same time as remortgaging his house and set up a business. To get through the stress of this whilst setting up and pursuing a successful business would take a lot of tolerance and self belief. The tolerance of uncertainty could be linked to innovation, if it is a new process or product and it has not been tried and tested in a market as is discussed by Kirzner (1973), the entrepreneur is taking a big risk even if the gap in the market it there in theory, there is no certainty due to the irrational behaviour of consumers. Schere gives a characteristic of entrepreneurs that they are open minded and can react quickly to change. The nature of innovation is that however prepared or quickly entrepreneurs can react they are often powerless to prevent a total overhaul of a market, due to the action of another entrepreneur (Schumpeter 1934).

Timmons et al (1985) gives one of the largest sets of traits in the field. The trait of having the drive to achieve and grow is one of them. The drive to grow is one trait of interest and can be linked in to what has already been discussed, due to the distinction between innovation and entrepreneurship, with innovation being the starting point of a process and the entrepreneurial side leading to the growth of the business, however innovation would be needed throughout the life of the business to lead to a growth in the idea, an example is Simon Cowell who from X factor went on to expand using entrepreneurial prowess to take it into other countries and then went on and created Britain¿½s got talent, which introduced a new idea and process to the TV industry. Simon Cowell, just one example can already counter the idea of Timmons et al, of they have Low need for status and power, as it is visible that this interests him.

Theories giving traits of entrepreneurs, however, is a generalisation of all entrepreneurs and can be easily criticised as there are so many different types and individual entrepreneurs that cannot be segmented and categorised. The studies give traits of entrepreneurs and do not take into account the background. For example, one entrepreneur may be a university graduate, whilst another could be a middle aged worker who has found a way doing what their business is doing more efficiently. Therefore it is likely that the traits they portray are not all identical to each other. If all the traits an entrepreneur is said to portray in journals and articles are true then entrepreneurs would be close to perfectly efficient and functioning human beings.

People can also be innovative but cannot make the step up to become entrepreneurial, the BBC television programme (2. The Age of Plenty, The Foods that make Billions 2010) it shows us the story of how business has turned grain into one of the biggest success stories of the modern food industry. In the beginning it was one of the Kellogg brothers who invented the product; however it was the other one of the brothers that took it forward as a business. The person who created the idea is the brother of the entrepreneur and he could be seen as innovative. His brother was the one who took the idea further, by increasing the product range and adding sugar to it where his brother chose not to. Therefore a differentiation is shown here between the two thought processes of simply just an inventor and then an entrepreneurial mind that has increased the size of the company, and its profits, significantly.

Apple, in recent times, is a great example to use when referring to both entrepreneurial expertise and new innovative products. Before the IPod was launched on October 23rd 2001, there were there means of personal media players which people were satisfied with. However the idea of ¿½1000 songs in your pocket¿½ came by surprise and nobody could have predicted it. People used portable CD players and walkmans without realising the potential and they were later deemed ¿½clunky and useless¿½. However, The IPod has become a household name, and despite not being the first mp3 player they revolutionised the MP3 and now people call them IPods rather than mp3 players. Here the iPod can be seen to be in line with Schumpeter¿½s idea of creative destruction (1934) because it is an example of how a new introduction (of the iPod) effectively destroyed the ideas that came before it, e.g. people don¿½t use walkman anymore, due to the intro of the iPod. The reason Apple is a near perfect example of a complementary relationship between both innovation and entrepreneurship is because of their actions after the initial introduction, and the way in which they continued to use innovative strategies and keep up the level of innovation and did not settle on the idea. Further developments on the IPod were brought to the market, for example the mini, shuffle, nano and the touch were all further innovations, and then they continued to create other products under the Apple brand. They made the new Mac books, the air and the pro, Apple Macs which further competed with other computer companies than they did in the past. Then more recently they have made the I Phone, which has 4 different models, and potentially more, iPad and in the future they are also looking into moving into a new (for them) form of media, TV. These innovative ideas, along with the fact that they are becoming a market leader in electronics and making huge profits year on year, whilst ¿½banging nails¿½ into past leader of the portable media industry (with the walkman) Sony¿½s ¿½coffin¿½ (Naughton, 2010). They demonstrate perfectly why innovation has such a relationship with entrepreneurship. The reality of it is, however, one day there will be innovation, not by apple, and perhaps not by any of the current firms in the electronics market, that will kill off apple and lead to a new market leader. Due to the nature of innovation, however much Apple prepare they will not be able to prevent this happening.

Drucker¿½s source of opportunity (1985) is a model in which the opportunities for an entrepreneur come about both internally and externally. Internally through inadequacy, changes in market or coming about through chance; or externally through perception and mood, demographic changes and new knowledge, from individuals or chance revelations.

¿½Small firms are more innovative than their large firm counterparts, being less bound by convention and more flexible¿½ (Carter & Jones-Evans 2006) This suggests that in large firms which have set policy and running to it, would be more ridged, and therefore less reactive to a change in the market and could be pushed out of the market due to new innovative firms taking over. Therefore for a business to succeed in the long term they may need innovative ideas to survive and prevent being overtaken by the more innovative smaller firms.

To sum up the relationship between innovation and entrepreneurship is not a simple thing to do with a single sentence answer. What I can conclude is that there is a differing relationship between the two in different fields of study. A common idea of the relationship is that it is a dependant one, in which both are needed in an economy to stimulate economic growth. The idea that innovation is a part of the entrepreneurial process is one that I agree with, there can be innovation without an entrepreneur involved; however there cannot be a successful entrepreneurial venture without the input of innovation. This is because innovation is what will be the distinction between ideas, without innovation there may be change or progression and this could lead to a stagnant economy. The examples I have given of entrepreneurs are ones that I believe show a differing amount of innovation, but similar amounts of success, Stelios had merely a change in the pricing and strategy of airline firms which when compared to the example of apple is only a small change, however, innovation is still shown and is still important. Overall in most cases it is not just an individual entrepreneur people may be inspired by an individual innovative idea and create entrepreneurial flow of a business over time as a team which can lead to great success with the right mix of both innovation and entrepreneurial processes.