Monday, 3 March 2014

22. The valley of death

When an innovation has passed the stage of proof of concept, and even when it has passed market tests, with prototypes, that is not the end of it. Often then the real problems start, in a valley of death in which many innovations strand.

The usual take on this is that now one has to pass from development to production, with corresponding investment and organization. Emphasis shifts from technical and commercial viability to efficient production and competition in the market. Rising volume of demand offers an opportunity for economies of scale, and increasing price competition, upon entry of competition, enforces its utilization.

The entrepreneur needs to develop into a manager. Production volume starts to increase, division of labour is needed, the distance between entrepreneur and the shop floor increases, direct supervision becomes unworkable, the entrepreneur must delegate, and more formal procedures of control have to be implemented.

Often, entrepreneurs cannot take this hurdle. Their psychology of stubbornness, independence, will to power, personal leadership, risk taking and informality, become a liability. Then they are replaced by people more prone to management, or the firm is taken over by an already established, larger one, with deeper pockets, more know-how, specialist support, more contacts, market position, brand name, and access to distribution channels. The entrepreneur often opts out, sells the firm, and starts anew elsewhere, in serial entrepreneurship.

From the perspective of previous items in this blog, concerning the tensions between exploration and exploitation (item 16) and the cycle of invention (item 18), the valley of depth obtains more perspective.

The transition is one from exploration to exploitation. As discussed in item 17, the problem is limited in case production is relatively stand-alone, with products being tailor made, varying between customers, with the need of variety and a degree of exploration within exploitation. Pressures of scale are also less with more custom-made products. 

In terms of the cycle of invention, varying the product according to context, in production, already entails differentiation and reciprocation.

In the case of a more systemic, inflexible production logic, the firm may opt to specialize in exploration and seek a partner in exploitation. In item 17 I indicated the case of small, exploratory biotech firms in partnership with large pharmaceutical companies.

According to the cycle of invention, the problem lies mostly in the transition from accommodation, in the search for a workable and viable novel combination, to the stage of consolidation, where the novelty needs to be embedded in institutions or to shift them (infrastructure, skills, laws and regulations, technical standards, distribution channels, and customer practices). Established firms will try to block or slow down entry.

An alternative to conforming to established institutions is a rush into further, more political entrepreneurship to break them open to the innovation, against powerful lobbies of established interests. This accords with the Schumpeterian concept of the entrepreneur as one who achieves creative destruction.

There are ways to help entrepreneurs through the valley of death, with support from experienced entrepreneurs and specialists, and alliances that are carefully crafted to fit the problems of combining exploration and exploitation and the stage of development along the cycle of discovery.

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