However some entrepreneurial people take their ideas forward and convert them into a reality. This entrepreneurial activity is characterised by risk and uncertainty, and while ideas are free, their realisation will require a commitment of time and money. For small start-up businesses in the UK, the initial financial investment in most cases comes from the individual and their families, and the risk can often involve their life savings and loans secured on their house. The stakes therefore are high, as are the failure rates for start-up companies.

But risks can be managed. As ideas get closer to fruition, risk and uncertainty can be reduced by product development, market research and financial projections. At the same time the level of investment escalates. The entrepreneur needs to have a strong belief in the viability of their idea, but be prepared to cut their losses at the optimum time if for example market testing shows that the market is unlikely to sustain viable levels of demand or the price required to cover costs.

risk-taking entrepreneurs who innovate create higher than normal profits

Intuitively we might think that entrepreneurs are rare or special people. That indeed was the view of Joseph Schumpeter, the economist who more than any other emphasised the key role of the entrepreneur. Working in the early 20^th century Schumpeter placed the individual entrepreneur right at the centre of global economic activity. He argued that risk-taking entrepreneurs who innovate create higher than normal profits, and this drives economic growth. For Schumpeter, the leading entrepreneurs in any field were very special people with almost superhuman qualities of vision and risk-taking. Once they had blazed a trail, others saw the opportunities for profits and jumped on the bandwagon, thus causing widespread economic upswings that could lift economies out of recession.

In his later work Schumpeter acknowledged the importance of large companies that could invest huge sums in research and development (R&D) and organise for innovation on an industrial scale, reducing the opportunities for individual entrepreneurs to compete. Whilst this remains partly true for many sectors, history has subsequently shown that innovation depends on both large and small companies. Indeed, in many areas of the economy innovation thrives on an interdependence between large and small firms. In part, this is linked to the cycle of technological change. Whereas the basic research and long-term development that lays the groundwork for a new technology such as microelectronics or new materials can only be achieved by university research labs and large corporations, small entrepreneurial companies have the flexibility to develop the opportunities offered by the technology in a myriad of niches across the economy.

An exception to this pattern is biotechnology. Here small companies, that are often university spin-offs, are able to conduct R&D over extended periods because they are backed by investors who take a longer than normal view on their investment, in the expectation of larger than normal profits in the future. And again we find a symbiosis between these small firms and the large pharmaceutical companies who can exploit the outcomes on a large scale.

Though the risks remain, there are currently unprecedented opportunities for entrepreneurial activity to exploit the technological platform provided by, in particular, information and communications technologies including the world wide web, new materials and biotechnology. These platforms can support the creation of new service-based businesses as well as entrepreneurial firms developing products, hardware and software. On the horizon, the next potential technological platform – nanotechnology – remains at an early a stage, but, no doubt in future it too will provide the basis for thousands of entrepreneurs to come up with brilliant ideas to exploit market niches.

Find out more

• Join the discussion - how do you get creative? What can your company do to help?
• What makes an inventor tick? - Sir James Dyson and Professor James Fleck shed light on the creative process, in our video extras
• Radical innovation - sometimes a new idea changes the landscape, and even well-established companies struggle to cope
• Managing innovation - how do companies get the creative juices flowing?
• Innovation and Entrepreneurship by John Bessant and Joe Tidd, published by Wiley
• The Journal of Entrepreneurship, published by Sage
• The Open University has a range of courses, and free course material, about creativity and innovation

About the author

Paul Quintas is Professor of Knowledge Management at the OU Business School. He has been researching, teaching and advising in the area of the management of knowledge and innovation for over 20 years.

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Experts writing on innovation suggest that it tends to be ‘path-dependent’. Firms innovate in areas they know something about, where they have a track record and cumulative capabilities. There are comparatively rare examples of firms moving into very new areas – Nokia from paper and forestry into mobile phones for example – but such transitions take a lot of time and require the growth of radically new capabilities.

Developing and distributing software is a very different process to hardware innovation and production. Software producers write computer code, which once written is easy and very cheap to replicate. In the software world, post-development production costs are virtually zero.

Not so with hardware. Hardware manufacturers have to think about materials, design for manufacture and production engineering. They must consider tricky things like how will the heat generated inside the box be dissipated. Or in the case of games consoles, will the product still function when subjected to the rough and tumble of the family home - children and pets can take their toll!

And with the economics of manufacture drawing production to China and the Far East, they have to learn how to manufacture and distribute complex technology on a global scale.

These issues are likely to be compounded when the company in question is not well known for its innovative capabilities in its core business: software. Microsoft has been a follower rather than leader in the main software innovations in the personal computer arena. The graphic user interface (that enables PCs to be accessed using a mouse) and the web browser are the most obvious examples where it has lagged well behind other firms.

How can such a company successfully leap to the forefront of games console technology, as is claimed for the Xbox 360^TM?

"Microsoft owes its phenomenal dominance ... to a ‘once in a century’ business error by IBM"

But then, Microsoft’s own success story is hardly typical. Microsoft owes its phenomenal dominance of the PC software business to the market share created by IBM. IBM established the industry standard for PCs and allowed Microsoft to own the rights to the vital operating system software. This gift has been described as a ‘once in a century’ business error by IBM.

How fitting that the new Xbox should be labelled ‘360’ since that was the name of the IBM range of mainframe computers that underpinned IBM share prices in their 20th century heyday.

IBM used to be referred to as ‘the environment’ because of its market dominance. Today Microsoft is arguably in a similar role in the PC software arena. But in the world of the games console their current Xbox is some way behind Sony’s PlayStation2 in terms of market share. Not being the dominant player is another new experience for Microsoft.

And in an intriguing twist of fate, in this new area of business for Microsoft it is now dependent on a clutch of software developers for the games that run on its Xboxes. This is a classic case of the hardware producer being dependent on having essential ‘complementary assets’ provided by external organizations over which it has no direct control.

The first Xbox established a bridgehead in the games market, albeit a way behind PlayStation2 in terms of market share. The Xbox 360^TM is intended to leap to the next generation of powerful games machines with new levels of processing power and support for multimedia, high definition graphics and other features.

Presumably few people buy a games console unless there are games programs to run on it. Here the Xbox 360^TM is presenting games developers with big technical challenges in exploiting its potential. A key question is whether the games producers have the resources and skills to do this fast enough. The extent to which they are prepared to invest in Xbox 360^TM developments is dependent on perceptions of the potential market. And the even more powerful PlayStation3 is looming on the 2006 horizon, attracting developer attention.

There are some indications that Microsoft have wider ambitions for the Xbox 360^TM. Though Microsoft’s marketing emphasises games, the 360 could be seen as an entertainment hub for the home. It may broaden its potential market by having the capability to run the same software as a PC, as well as functioning as a media centre for audio and video.

Microsoft also emphasises Xbox Live® – the internet link that enables gamers to interact with each other and also download upgrades. As well as providing new revenue streams this potentially adds a new dimension to the console’s repertoire, downloading music and video files. Who knows, these could even become as significant as games as a market driver.

"Microsoft’s move out of its software comfort zone ... is a bold step"

Previously only Apple has succeeded in matching innovation in both Personal Computing hardware and software, and innovating new classes of products such as the iPod. Microsoft’s move out of its software comfort zone into hardware design and manufacture, and beyond the PC business into games consoles, is a bold step.

The company does not have a distinguished record for managing innovation. But in the Xbox 360^TM they may for the first time be the primary mover in a new class of products. Whether they can replicate Nokia in building world-class capability in a new area remains to be seen.

Further reading

• Managing innovation – how do companies get the creative juices flowing?
• Network effects – the interplay between products and markets is complex
• 'Managing Knowledge and Innovation Across Boundaries' by Paul Quintas, in Managing Knowledge: The Essential Reader, 2nd Edition edited by S Little and T Ray, published by Sage
• The Nokia Revolution: The Story of an Extraordinary Company That Transformed an Industry by D Steinbock, published by AMACOM
• Managing Innovation: Integrating Technological, Market and Organizational Change (3rd edition) by J Tidd, J Bessant and K Pavitt, published by John Wiley & Sons Inc

About the author

Paul Quintas is Professor of Knowledge Management at the OU Business School. He has been researching, teaching and advising in the area of the management of knowledge and innovation for over 20 years.

Subscribe to Paul Quintas's posts