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Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

Many of us have ideas for new gadgets or business services that would solve a particular problem or fulfil an unmet need, but, for better or worse, most of these remain unfulfilled ideas. Even those ideas that reach the stage of being protected by a patent of copyright may remain undeveloped – indeed across Europe around a third of all patents are never exploited.

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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Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

I was struck by the claim that one in five parents in the Money Programme ‘Cost of Kids’ survey admitted to buying new gadgets after pressure from their children, with much of the resulting expenditure ending up on credit cards. The example was consumer electronics companies recruiting our kids to get us to buy gadgets that we don’t need at prices we can’t afford, and only they know how to work. But more worrying is the evidence that pester power, or the ‘nag factor’ as it’s known in America, could be costing us more than money. By encouraging them to ask for the wrong kind of food and drink it’s costing some of our children their health.

From the forum - "the trick to keeping costs down is to think differently and keep things natural"

Marketing first woke up to children in the middle of the 20th century, particularly their power to influence adult purchasing. It began to aim products directly at them rather than having them make do with modified versions of adult products. In many ways this has been a good thing. Taking account of children’s needs in designing products such as holidays, cars or clothing makes a lot of sense. But in other areas, such as fizzy drinks, pre-sweetened cereals and fast food, the effect has been to promote fun and taste well beyond any sense of nutritional value. The vast majority of the food advertising seen by children is for such high fat, salt and sugar (HFSS) foods. Any parent who wants to do the best for their children’s dietary habits has a struggle on their hands as a result.

Advertisers deny deliberately setting parents at odds with their children. Industry codes of practice explicitly forbid such tactics, and pundits argue that pestering has much more to do with age than ads. But there is plenty of evidence from consumer research that parents are uncomfortably aware of ceding to demands stimulated by child-directed advertising. One recent study in Sweden revealed that parents actively avoided supermarket shopping accompanied by their children because of the stress it caused. And a widely-used UK market research report on marketing to children underlines the importance of ‘influenced purchasing’.

Opponents in the pester power debate are not shy of throwing contradictory research findings at each other to support their respective positions. But how good is the evidence, and which way does it point? To answer this question OU Business School and our partners in the Institute of Social Marketing recently reviewed a selection of key research articles evaluating the effect of food promotion on children’s attempts to influence purchasing by adults. We only looked at studies meeting strict quality and relevance criteria. They covered children in different parts of the world (US, UK, Saudi Arabia and India), and used a variety of methodologies. Yet they all concurred that food promotion does indeed stimulate demands from children for HFSS foods, increasing conflict in the supermarket aisles and leading in many cases to exasperated expenditure on less healthy products.

The food advertising industry, pointing to its record of self-regulation in the UK, claims that tightening further the rules on advertising to children is disproportionate. It argues that advertising is only one of a number of factors guiding what children want to eat, and that its effect is negligible compared to, say, the influence of parents, schools or peers. But even if advertising on its own only accounted for 2% of the variation in children’s food choice and consequent obesity (as has been suggested by some researchers), the cumulative effect will leave a significant number with health problems.

Against this kind of controversy, Ofcom, the UK telecommunications regulator, has spent a year consulting on a number of different options to tighten up regulation. On 22nd February 2007 it issued new rules banning HFSS food ads from programming likely to be popular with under 16s by the end of the year. While this looks like good news for any harassed parents out there, it has been greeted with dismay by health campaigners for not going far enough (many wanted a total ban on such ads pre 9pm). Industry bodies are not happy either, criticising the definitional criteria for HFSS foods as inconsistent. Furthermore, Ofcom’s announcement included a commitment to reviewing the effectiveness and scope of the new arrangements in autumn 2008, which seems rather early in the day to be looking for conclusive results. You may be sure that this controversy will not be over till the, er, fat lady sings.

Further reading

• The price of parenthood – having children brings many changes
• Join the discussion – how does the cost of children affect your view of having kids?
• The cost of kids – the Money Programme investigates the rising price of parenthood 
• ‘Food Advertising, Pester Power, and Its Effects’ in International Journal of Advertising, November 2006
• Television Advertising of Food and Drink Products to Children published by Ofcom

About the author

Terry O'Sullivan is lecturer in marketing at the Open University Business School. He researches and teaches in the fields of fundraising, marketing communications and non-profit marketing.

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