Chapter 9: Innovation and entrepreneurship

Contents

  • Christophe Krois on being an innovation manager
  • Aguitu Gudeta – Refugee Entrepreneurship in Europe
  • EVs – Lucid Cars (not just Tesla)
  • Gelatex Technogies – entrepreneurship product/technology (making leather from waste)
  • Changing the value of time – rail and the new sleeper age
  • Young entrepreneurs – Jerome Foster II
  • Business model innovation – why songwriters should be valued higher
  • Making money from music – industry entrepreneur, Miles Copeland
  • Battery technology – innovating the casing
  • Cosmetic retail – no more beauty counters
  • Experience curve – wind turbines
  • Digital transformation
  • Rothwell – generations of innovation
  • Vertical agriculture – the case of Plenty
  • Indicative solutions to questions concluding the chapter

What does an innovation manager do? Christophe Krois of Siemens talks to John Bessant

Aguitu Gudeta – Refugee Entrepreneurship in Europe

The textbook has made the case for students studying strategy to have a full understanding of world politics – the P in PESTEL. A case can also be made of an H – for History. The case of Aguitu Gudeta captures both of these factors and is a good case study capturing the dynamics of entrepreneurship – vision, starting from nothing, building markets and employing environmentally sustainable business models and partnerships.

Agitu Gudeta and her goats: Picture: still from DW documentary

The content for this case study is captured in a film made by Andreas Pichler for Deutsche Welle which students should watch.

Gudeta was originally from Ethiopia which had colonial ties to Italy. Gudeta came to Italy to study sociology at Trentino University. She returned to Ethiopia and found herself fleeing for her life due to her political involvement resisting “land grabbing”. In 2010 she returned to Italy – in particular to the German speaking region of Trentino/Alto Adige – a constitutionally autonomous region in the north. There, Gudeta still had friends who were able to put her up until she was able to support herself. Alto Adige is a remote rural part of Italy with a key resource: common pasture land that could be leased.

Gudeta bought 15 goats – specifically the indigenous Pezzato Mochena. In 2020 the herd was 180 animals. Gudeta learned cheese making in France – goat cheese in Italy is not so common; essentially she went to learn the craft from the experts. She experimented with various cheeses and assessed what the locals preferred – she identified her market and sought to meet the needs and preferences within the region.

She opened a dairy in an old – but unused – Kindergarten in the village of Frassilongo (unusued because of regional depopulation). It is called “La Capra Felice” – the Happy Goat. Gudeta sold her cheese in the local market in Trentino and also at the diary.

Gudeta was first treated with suspicion as an outsider; but became a well-respected member of the community who started to bring visitors into the region, spreading wealth. She allowed visitors to come to the pasture and the diary to see the goats and observe the cheese making. Additionally, she taught young Italians the craft – helping to provide local employment and stem the depopulation. She also employed other refugees as her goat herders – connected as she was with refugee NGOs looking to place refugees.

As the business expanded, so did her vision. Strategically, she did not choose to seek markets beyond the region. Instead her vision was to bring people to the region attracted by the cheese. She made plans to convert the upper rooms in the diary to a hotel using a community fund to limit the debt that she would need to take on. She diversified in an unrelated way and innovated her business model in the process.

She also had good links to the region’s mayor who was supportive of her idea of extending the area’s pasture land.

All entrepreneurs have vision and determination. The hours are long (goats are milked at 6am) and the work is physical. Markets are created through resources and capabilities (a cheese making skill acquired by learning from others) and a physical presence amongst the customers (weekly market in Trentino and other social fora). Like all entrepreneurs, being multi-skilled is important. There is a business to be run and a future to be made. In larger businesses these tasks are separate, for small entrepreneurial businesses, they are combined. Success is partly achieved by thinking politically – providing political leaders with solutions; often just employment to local people.

The environment can also be unpredictable. Any macro-analysis – PESTEL for example – would identify legal hurdles (planning, health and safety, etc.), but where does the new threat of predators – wolves and bears fit? The EU solution to these new predators is fences. Gudeta employs firecrackers!

The story has a tragic ending. On 29 December 2020, Gudeta was brutally murdered in her own home. It brings to light one further issue that is not usually considered in business strategy. In the film Gudeta talks about the growing populism at the centre of Italian politics where suspicion of foreigners – immigrants – is part of the message. Prior to her murder, her herd had been attacked by emboldened bigots. There is also the element of male violence – again, emboldened by populist politicians whose underlying misogyny enforces inequalities.

Gudeta’s business story is one of positive immigration. Immigrants coming into the country and contributing significantly to a town or region. They are not a burden or exploitative. Fleeing violence as they often do, a desire to be valued members of the communities they join, is a driving force.

Lucid Cars

Lucid cars is a California-based electric car maker. The management’s aspiration is to be a mid-range, volume manufacturer and be a direct competitor of Tesla, currently the market leader in the electric car industry.

Lucid is a fast-second in innovation terminology. It’s CEO, Peter Rawlinson, is a veteran of Jaguar, Lotus, Tesla and Atieva, a battery maker, whose products power Formula E cars. Motor racing is used by many manufacturers to test the resilience of their products and push the boundaries of innovation.

It is reported that Lucid is following Tesla’s business model very closely. It releases a premium model (Lucid Air) in the second half of 2021. It will have a range of 517 miles (832 Kms), though with a price tag of $163,000!

The fast-second element exhibits the following characteristics:

  • efficiencies with in-house development of batteries, gears and power electronics
  • efficiencies in manufacturing processes (simplification)
  • building in reliability in product through coolant innovation
  • market listing through a Spac (Special Purpose Acquisition Company)

Attempts at building alliances with incumbent assemblers has proved difficult; in particular with Toyota, Honda and Hyundai. Rawlinson is looking to licence the technologies in order to get the products to market faster than is possible in-house, driven as he is by the climate change imperative.

Reported in the Guardian newspaper, 3 April 2021. Jasper Jolly.

This was updated in the Economist, 5 June 2021. Lucid has a number of competitors in the USA, Europe and, crucially, China. The Chinese competitors include Aiways, Li Auto, Nio, WM Motor, and XPeng. European competitors include: Rimac and Hispano Suiza (both hypercars). In the USA competitors include: Canoo, Fisker, Lordstown and Rivian. All of these face competition from incumbents such as GM, Ford, BMW, Daimler and VW group and Tesla. In the UK, the start-up, Arrival has focused on electric vans and buses.

What is particularly interesting in the Economist article is their breakdown of what each of the start-ups need to be successful:

  1. Find the position (e.g. niche. Lucid has gone for family saloons; Arrival for vans)
  2. find a way of producing at scale – building factories; taking over redundant factories
  3. creating a sales and distribution network – do they opt for dealerships/agents or direct/online? If the latter, how is repair and maintenance to be managed?

Gelatex Technologies

Gelatex Technologies is an Estonian start-up that takes an under-used by-product of the meat industry, Gelatine, and turns it into useable and wearable leather.

The business founders are 26 year-old Märt-Erik Martens and Mari-Ann Meigo Fonseca (MBA). Martens was 21 years old when they founded the business. He studied material science at the university in Estonia’s second city, Tartu, and brought that knowledge into the business. His dream had been to to discover something new and manufacture products from it.

The innovation is the manufacturing process. Gelatine quickly deteriorates, so it has to be used quickly. The process is the company secret, but unlike the tanning process of real leather, it does not use harmful chemicals or oil. The process is environmentally clean and has a circular economy business model.

It is, however, a chemical process. Fibres are generated and combined to make a layered sheet of material with the properties of leather. It can be dyed. It is also water repellent. It may also have an advantage that it is non-allergic (many people cannot wear leather against their skin). The main customers will be from the fashion industry. Martens is working with Zara, Hermes and Swatch amongst others. There is also a potential market in the automotive sector.

In order to be competitive, however, the company needs to partner with other firms that have the facilities to manufacture at scale. The company’s own facility produces a square-metre for €120. Conventional leather costs €40. Leather made from plastic costs around €10 to manufacture.

The process also generates real options: the technology can be deployed in other sectors such as dentistry, battery development, synthetic meat and muscle cells (medicine).

Sources: Brand Eins, December 2020; Envirotec, 18 October 2019; Picture from Gelatex website.

Valuing Time

Travel has been, for many years, dominated by time. Time is lost when people travel. People need to get from place to place as fast as possible in order to save it. Low-cost airlines innovated in airline business models enabled by liberalisation of the skies (Open Skies policy of the EU, for example). They stripped out costs and democratised access to cities within the range of the class of aircraft used (largely Airbus 319/Boeing 727). Notwithstanding the airport experience and the time “lost” there, customers could spend a weekend in a previously inaccessible place as a matter of course. Money having been removed as a barrier to such experience, the limiting factor was time. Air travel solved the problem. It gave time back to customers.

ÖBB NightJet service, Wien

In times of climate awareness, there appears now to be a phenomenon colloquially known as “the Greta effect”, named after the Swedish climate activist, Greta Thunberg. There was – prior to the pandemic – a resurgence in long-distance rail travel, and particularly in sleeper services. What was thought a wise decision in Germany to sell all sleeper services to the Austrian operator, ÖBB, now seems enlightened on the part of OBB and not-so-wise for Deutsche Bahn.

Many young people have experienced, in Europe, Inter-Rail. Including the author of this text. Inter-Rail gave holders of the pass the opportunity to travel throughout Europe on a single ticket. The journeys were not the most comfortable or convenient, but it was cost-effective and provided the opportunity for adventure, serendipity and experience.

Long-distance continental trains services can be long in duration. London to Munich, for example, is 11 hours’ (three changes). By plane, 3-4 hours (flight 90 minutes’). Train operators, therefore, have conceded many routes to low-cost airlines in recent years. However, the climate emergency opens up new opportunities. If operators, customers and governments re-evaluate value, the train journey does not have to represent lost time.

The resurgence of the sleeper train is a case in point. A new sleeper service between Brussels and Prague is being launched in 2021. The rolling stock is owned by a private company called RegioJet and the services is a partnership with the European Sleeper Co-operative. The founder of the co-operative, is quoted in the Observer newspaper:

The sleeper train is not as quick as a plane but you can board and you don’t need to queue up anywhere…you can sit down, relax, read a book, prepare your meeting, watch Netflix, have a drink. You go to sleep. You wake up the next morning, you open your curtain and you’re in different worlds. I mean, how great is that? And more and more people are starting to understand that this is actually a different approach to the value of time.

The Observer, 11 April 2021

The value proposition changes. They sell an experience – the journey is part of the experience. This is applicable to all rail journeys. Customers want to get to their destination quickly because the experience is so awful – people crammed into train carriages, blocked toilets, poor catering, expensive and unreliable internet, no charging points, etc.

The potential for train travel and rail innovation was brought into focus when the French Parliament voted to ban domestic air travel where trains are an option. The restriction is not too onerous as what qualifies as “an option” is a journey not longer than 150 minutes; however, that is enough to capture flights between London and Manchester using current infrastructure. In Germany, routes such as Munich – Frankfurt would qualify.

As a first move and a warning to airlines, it is clear that their strategy need amendment. Though it was reported, additionally, that Air France’s domestic routes are significant loss makers.

Reporting on French vote, The Guardian, 13 April 2021: Leo Murray

Picture: By Lukas3333 – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=54107511

Jerome Foster II

Jerome Foster II

Jerome Foster II is a young climate activist using entrepreneurship to work around politicians. On the election of Donald Trump in 2016, Foster started his lone school strike outside of the Whitehouse in Washington DC in parallel with Greta Thunberg, the founder of Fridays for Future. Foster says that he realised that lobbying politicians who had had 50 years’ to read the papers on the science of climate change, but haven’t, is a waste of energy. Though at the age of 16 he became an intern for the late John Lewis in Congress, he took to entrepreneurship to bring around the change necessary. To date he is responsible for three initiatives:

  • OneMillionOfUs – a youth voting and advocacy organisation mobilising young people on issues not only about climate change but also 4 other youth social movements: gun violence, immigration reform, gender equality, and racial equality. The purpose is to spur on systemic change by young people within local and global civil society to bring about social change and political engagement.
  • TAU VR – Virtual Reality Company – that build immersive environs around climate change, American history and latin American immigration, amongst others.
  • The Climate Reporter – an indigenous peoples, climate-focused and news outlet.

In April 2021, Foster was appointed to the panel of advisers to the Biden administration.

Key source: The Guardian, 13 April 2021

Picture: Still from ABC report

Songwriters

Many of us listen to music. We have favourite artists and favourite pieces of music. With the exception of the great classics, however, we tend not to think too much about the writers of the piece we listen to. We remember Lennon and McCartney, the songwriters in groups, but the world of music is dominated by the often anonymous writers of the songs.

Björn Ulvaeus, one half of the song writing team that was ABBA, tells how perfected his craft and took risks. For example, Waterloo was not the obvious song choice for the Eurovision Song Contest in 1974; another song, Hasta Mañana, had better winning credentials. Song writers, however, got paid fairly on the basis of airplay on radio, television performances and record sales.

The digitalisation of music – particularly with the MP3 compressed format for music – changed much. The primary vehicle for recorded music ceased to be the album, instead file sharing of songs and latterly, steaming. File sharing was a straight infringement of copyright and is illegal. The growth of online music stores such as Apple Music grew out of the desire to maintain downloads while ensuring that artists and other stakeholders got paid. Though not very much.

One response to this change was for live music and performance to emerge as a much more important source of income for artists. Artists here were diversifying their income streams. This, of course was affected by the Covid-19 pandemic which shut down live music.

Streaming services, such as Spotify, changed the business model again. Instead of buying a “tangible” product that is kept on some physical products – a CD or an electronic download saved to a mobile phone or hard drive – customers merely listened on demand. The problem with this was the remuneration package for the creatives behind the music, not the distributors behind the platforms. Artists have sought for many years to get a fair share of the revenue generated by streaming (some have withdrawn their music from the platforms in protest).

Ulvaeus argues that the current revenue split is grossly unfair to songwriters. He writes:

 …a million subscriber streams, an independent label artist could earn more than $3,000 (£2,175), whereas the songwriter could expect to earn between $1,200 (£870) and $1,400 (£1,015) and, even then, only if they are the sole songwriter on the track. If you co-wrote the song, that money is split between you and your fellow writers. 

Björn Ulvaeus writing in the Guardian, 17 April 2021

Streaming had other effects. Because the song became the key commodity rather than the artist (evidenced by search terms used by subscribers to streaming services), artists and songwriters have attended the equivalent of boot camps to churn out generic music that is likely to get listeners’ attention. For Ulvaeus, this factory approach deskills the songwriting craft. As a songwriter himself, he claims to have written only 15 or songs per year – though the creative process saw may songs ruthlessly disposed of that were deemed not up to scratch. He also claims that he and Benny Andersson would not have been successful under that model (a hypothesis that cannot be tested). They had an apprenticeship that the current music industry no longer supports.

Ulvaeus draws on a report entitled Rebalancing the Song Economy by Mark Mulligan and Keith Jopling for MIDiA to offer options for innovating the business model in the industry. Assuming, that is, of course, that songwriters are deemed central to the creative process of music production, distribution and consumption.

Idea 1

Research shows that on streaming services there are two types of music and listening. First is the “lean back” background music that sits on many playlists compiled for listening to whilst doing other things. Studying, for example. Second, “lean forward” music that is actively searched for. The analogy to previous years was the difference between just listening to the radio and actively seeking out music and buying it on a format such as vinyl or cassette. Here, songwriters should get a better share of the revenue from “lean forward” than “lean back”, as the consumer has actively selected the song over others.

Idea 2

Songwriters and artists make partnerships which enables them to share the revenue from streaming. The artist can not only contribute to the composition rather than having it merely presented to them, but the songwriter can build a profile, reputation and share in the revenue generation. This is known as the “songwriter in residence” model and essentially means the songwriter joins the band (or at least the permanent team).

Idea 3

This is a so-called “fan-centric” approach. under this approach, the streaming service. This works on the basis that each subscriber’s behaviour allocates a monetary value on each song on the basis of their listening habits over the month. Essentially artists and songwriters get allocated revenue on the basis of fans’ listening preferences. For example, if song X represents one-tenth of the subscriber’s listening in that month, then one-tenth of the fan’s subscription (or part allocated to stakeholders other than the platform owners).

Analysis

This case exhibits a number of strategy concepts. Primarily it is one of innovation. The changes between formats are radical innovations in both technologies (record and cassette players to CD players to MP3 files on mobile phones) and business models. In the days of records – vinyl/cassettes – the record companies controlled the value chain (see chapter 3) – everything from writing, recording to manufacture, marketing and retail. Once music became digital and digitised, their control over the value chain diminished. File transfer was, and remains, easy.

Artists had traditionally been signed to record labels. Those that were unsuccessful were dropped. Some were able to find other labels or go independent, but it was very difficult and unusual. Songwriters often worked for particular record companies rather than for artists. In the digital era, artists have different routes to market. Websites such as Soundcloud and Bandcamp are examples of platforms for artists sell music in a marketplace.

The MP3 format was classically disruptive. By this we mean that whilst the file format was inferior in quality to what would be experienced on a CD or even lossless format downloaded, it was sufficiently good for most listeners and small enough to cram on to music players and mobile phones. The music production company had always sought to make quality better – accessed increasingly through expensive music equipment in the home. But the majority of consumers neither had the equipment nor wanted to listen in the home exclusively.

In the case above, the ideas coming from MIDiA are innovations in business models. The business model of songwriters and other stakeholders has to change to match the production and distribution system – increasingly streaming. The streaming services do need songwriters because without them new content is reduced. Consumption continues to look for the new. That is the nature of art.

Music entrepreneurship

Miles Copeland, manager of some of the biggest bands of the 80s and 90s, record company entrepreneur (the IRS label) and owner of a castle, talks about his experience of trying things and learning from failure on the Bunker Daily podcast.

Battery technology – innovating the casing

Batteries have for many years been the limiting factor in the diffusion of electrification, particularly for land transport – cars, trucks and buses. The battery that will enable mass aviation will be the holy grail – at the moment it is totally out of reach.

Like many products, the technology that makes them run is one thing, the packaging that makes them usable, quite another. It is often an afterthought. It can be the difference between a successful and unsuccessful product.

The casings for batteries is a perhaps one of those afterthoughts. An Australian company, Vaulta, has developed a casing that is easier to make (fewer components), is lighter in weight, can reduce the size of batteries by as much as 18 per cent, and is not welded so that the internal elements of a battery can be removed, re-used and recycled.

Conceptually here we have examples of entrepreneurship, design innovation and circularity (at least partial and enabling).

Further reading, The Guardian, 17 July 2021 (Ben Smee, Lightbulb moment’: the battery technology invented in a Brisbane garage that is going global)

Cosmetic retail – no more beauty counters

Department stores have traditionally located beauty counters at the entrance to their stores. Accessing airport departure lounges and gates normally mandates a walk through duty-free counters dominated by beauty products (and alcohol). A combination of the internet and Covid-19 are changing the way cosmetics are sold and marketed. It has also contributed to the demise of high-street department stores, most recently Debenhams in the UK.

Incumbent firms such as L’Oréal, Clarins and Mac and being challenged by new, fast-growing brands that access the market through internet sales and influencers. Younger buyers, particularly, rely on influencers to advise on trends and looks. Many of these influencers are celebrities and owners of brands such as Rihianna and her Fenty Beauty empire.

Incumbents are, looking to consolidate by buying these relatively new entrants; for example, the HUT group’s purchase of Cult Beauty and Sephora‘s acquisition of FeelUnique, both of which are shopfronts for existing brands. Other acquisitions include international make-up artist, Charlotte Tilbury‘s red-carpet inspired range by Puig.

The products, too, are adapting to new circumstances, not least the pandemic and how we present ourselves on Zoom/Teams and face coverings (rendering lipstick a shade superfluous?). The shift to soaps and skincare products is palpable. This has required a rapid shift in marketing, production capabilities, distribution and sourcing.

Full story see The Guardian, 7 August 2021 (Sarah Butler, A look in the mirror: the existential threat facing beauty halls).

Experience curve

What does the experience curve look like in practice? Taking the case of off-shore wind, the first offshore wind farms, for want of a better term, were modified versions of on-shore wind farms. But the marine environment is much more challenging than onshore. Sometimes the facilities are simply not accessible in the winter and/or the support vessels are not available. On-shore wind farms and turbines are always accessible, even in the winter, and hence the maintenance regime can be managed differently.

What is understood here in terms of the experience curve is the following:

  • product innovation – resilience of materials, stability of seabed anchoring, etc.
  • process innovation – new and efficient ways of organising maintenance and anticipating turbine failure)

To hear the full case, listen to Simon Watson, Director of the Delft University of Technology Wind Energy Institute on the Climate Now podcast. For the discussion on the experience curve, listen 7:39 to 10:31 in particular.

Digital Transformation

The text defines digitalization as: “…the exploitation of business or societal opportunities arising from either the conversion of existing data into digital files or the creation of data exclusively in digital form”.

The text defines digitization as: “the process of converting data or information into a digital format to be exploited by information and communication technologies (ICTs).

Digital transformation is a process by which economies, businesses, society and lifestyles are restructured around the opportunities created by digitization (Rachinger, Rauter et al. 2019).

What does this mean in a firm? In the podcast below, John Bessant talks to Alan Brown, Professor of Digital Economy at the University of Exeter, and author of the influential book ‘Delivering digital transformation’.

Brown has many years of experience of big tech in the USA having worked for Texas Instruments and in silicon valley.

In his research and consultancy, Brown talks about two kinds of transformation:

  • First is the internal digital transformation. This involves the digitization of assets, reconfiguring internal management systems, contracts, human resources
  • second is the external world – what is happening to the firm. This is stakeholders digitally interacting with the firm/organization and the shift from quantifiable outputs to measurable outcomes.

There are two kinds of organization:

  • Born-digital/digital-first
  • incumbents

Born digitals are firms that have always been digital; for example, Amazon. Indeed, notes Brown, Amazon in one year recruited 420,000 new employees in a single year. That can only realistically be done through a digital HR system.

The incumbents are firms such as GE and IBM. Both, reports Brown, made a good start with their digitization of legacy data and cloud storage, but have faltered in recent times due to:

  • legacy systems that do not seamlessly interact/communicate with one another
  • resistance from users
  • organizational structures that are insufficiently agile

On the latter point, Brown uses the example of university teaching and most educators’ experience of online/remote teaching necessitated by the Covid-19 pandemic. Educators have learned how to use and leverage technology in their teaching. This includes full utilization of platforms such as Blackboard and Moodle through to calling in outside speakers or integrating video/speech. But, notes Brown, the approval systems for module/course changes are much slower than the learning that has occurred. Agility in teaching would ordinarily enable the incorporation of new content, assessment approaches, delivery methods. However, the approval cycle – proposal to University-level approval – or changes of this kind can lag, sometimes as much as by five years!

Rothwell – generations of innovation

The book draws on the work of Roy Rothwell and generations of innovation. Starting technology push and market pull I pursue each generation and create a model for the 21st Century. This is why it is useful to incorporate into a business strategy curriculum.

Vertical agriculture – the case of Plenty

The book text does not suggest that vertical agriculture is a solution to the world’s food problems. It is true that vertical agriculture is perfect for some crops such as salads, and not for others such as grains. It is also probable that vertical agriculture serves the demand of an already privileged set of consumers – primarily the middle classes, often in the United States of America, And finally, it is also the case that energy prices are now much higher than they were when the script was written – costs associated with vertical agriculture are higher too. Though that is to suggest that energy is not consumed in the traditional salad agriculture. I can, at the moment, go into a supermarket and buy salads in the winter. This is not possible without energy. The Guardian newspaper has two interesting articles, one on vertical agriculture and one on heat resistant crops.

Indicative solutions to questions concluding the chapter