Innovation in Entrepreneurship: Reference to McDonald’s

Ismail Bin Ahmed October, 2006

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Table of Contents 1.0 Introduction

2.0 McDonald's and Innovation

3.0 Importance of innovation

4.0 Types of Innovation

4.1 The Innovation Process

5.0 When Companies Fail to Innovate

6.0 What Inhibits Innovation?

7.0 Criteria for Successful Innovation

8.0 Conclusion: Challenge for Global Innovation

9.0 Bibliography & References

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Innovation in Entrepreneurship: Reference to McDonald’s

1.0 Introduction

One of the most successful ways to prosper in business is to continue to innovate and introduce new products while competitors make cutbacks and downsize.

Gary Hamel who has consulted on strategy and innovation for Dow Chemical, General Motors, IBM, Nokia and Shell says innovation is business's lifeblood (Kirkpatrick D & Hamel G, 2004). Peter Drucker wrote that "the business has only these two basic functions: marketing and innovation. Marketing and innovation produce results: all the rest are costs." (Doyle, 2001)

Advertising and promotion are the trappings of marketing and the substance is innovation - finding new and genuinely superior ways of meeting the needs of customers. Innovation is the only way that ensures competitiveness and shareholder value.

2.0 McDonald's and Innovation

Comparing McDonald's and Burger King, the former have the competitive edge in core skills. In 1968 both Burger King and McDonald's had less than 1000 outlets. By 1990, despite backing from its parent company, Burger King had increased its outlets to a total of only 5500 or so, while McDonald's had emerged as the clear industry leader with over 10 000 outlets and with sales growing at 13 per cent per year. McDonald's had the competitive edge on all counts (Wilson & Gilligan, 1997).

Core skills McDonald's Burger King Site selection Penchant for finding the plum. Generally good locations. High-quality service Unparalleled consistency. Suffers from operational sloppiness.

Product innovation A knack for product development. Spotty record with new products.

Communications Surrogate man. Comes off as aggressive, masculine and distant.

Table 1: Source: (Wilson & Gilligan, 1997) pg. 654: From Irvin and Michaels (1989)

However, the product innovation as shown in Table 1 above is only one type of innovation. A process innovation developed by a franchisee, Steven Bigari and not McDonalds itself has dramatically increased the efficiency of his 12 McDonald's outlets by reducing its drive-through order time by 30 seconds

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to a little more than one-minute per transaction which was well below the McDonald's drive-through average order time of two-minutes thirty-six seconds. Besides, he has increased the number of cars his drive-throughs handle by 15% from 226 cars per hour to 260 cars (Brandautopsy, 2004).

However it is the franchisees and not McDonald's itself developed innovative ideas according to customer demand even though they have to agree to operate their restaurants in the McDonald's way. Developing new processes is equally crucial to any business, even one which has successfully relied on a limited menu for many years. Consumer tastes change over time and a company needs to respond to these changes.

Innovation injects dynamism and allows the firm to exploit markets previously overlooked or ignored. The introduction of the Egg McMuffin in 1971, for example, enabled McDonald's to cater to the breakfast trade. Filet-o-Fish, Drive-thru's and Playlands were all products or concepts developed by franchisees (thetimes100).

According to the article Mickey D's McMakeover at News: Analysis & Commentary; BusinessWeek, the 51-year-old fast-food giant is adopting a hip new look. It is redesigning its 30,000 eateries around the globe in a 21st century makeover of unprecedented scale with comfortable armchairs, cool hanging light, funky graphics and photos on the walls, Wi-Fi access and premium coffee.

But only now since early 1980s when McDonald's restaurants introduced play places for children is it having a major change. Only over the past three years has McDonald's revamped its menu to attract a new breed of customer adding healthier items like premium salads targeted at women, and apple slices and skim milk for children.

But McDonald's is ahead of others only because the name has the property of being a top of mind brand. If one is asked to identify fast-food restaurants, McDonald's almost always heads the list (Clow & Baack, 2001).

3.0 Importance of innovation

Innovation is important because without it, the profits generated by a firm's products and services decline because increasing competition forces down prices and the emergence of new products and services ensures market share. Besides, the power of buyers and customers' sensitivity to price tend to increase over time which causes commoditisation, falling margins and diminished growth potential (Doyle, 2001).

The opportunities for innovation are created by incessant changes in the market environment. New technology, global competition, changing tastes and fashions create new needs such as more healthy products, new drugs to extend and improve life, better public transport and better quality of products and services consumed. At the same time increasing knowledge

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provides new solutions to produce the new and superior products and services required. Companies succeed if they identify these emerging needs accurately and act to put together the technology needed. This matching of new market opportunities with production possibilities is innovation.

The pursuit of success in spite of a falling economy has left many corporate executives scratching their heads in frustration. What most executives do not fully grasp, however, is how to generate innovation, measure it, or most importantly, make it work.

4.0 Types of Innovation (Doyle, 2001)

New products such as Viagra and Pfizer are obviously one type of innovation and companies like 3M, Hewlett Packard and Merck make enviable profits by continuously offering new products. As demonstrated in section 2.0, product innovation occurs often in McDonalds.

But much successful innovation depends on the incremental adaptation to changes in consumer expectations and life styles. It's easy to knock off an innovative product, but an innovative business system is much harder to replicate (Bhide, 1996). Diet Coke, Persil Tablets and self-storage warehouses are marketing concepts that identify and capitalise on opportunities created by environmental change and added enormous value to companies.

New distribution channels are another innovation opportunity. Companies like Dell, First Direct and Amazon.com all placed themselves into leadership positions by matching evolving consumer needs with emerging technological solutions. New markets or new market segments also provide opportunities for innovation. Castrol exploited big growth opportunities in China and British Steel found new opportunities in the construction segment.

4.1 The Innovation Process

The is a difference between invention and innovation. Invention creates new products but innovation creates new solutions that offer value to customers. Sometimes, an innovation does not involve new technology. Its essence is its abilty to meet customer's needs effectively. Often, opportunities for innovation are caused by environmental change. Over time, consumers develop new wants and new knowledge enables new solutions to be developed.

5.0 When Companies Fail to Innovate

Companies succeed when they adapt to change and decline when they fail to adapt their strategies and organisations to emerging market opportunities. Faced with decline, such companies cut costs and investment because the problem is perceived as a financial one and the solution is by rationalisation.

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Generally it is quite easy to produce an improvement in profits hence temporarily creates the appearance of a 'turnaround.' All that is required are decisions to cut costs and dispose of saleable assets.

But this internal focus will never provide a lasting solution because it deals with the symptoms rather than the causes of the problem. The decline in performance is rarely caused by a lack of cost control but rather by a failure at innovation.

Fundamental problem solving requires developing new products and services which improve the firm's competitiveness in the global marketplace. It requires a longer term and a more complex change programme of transforming the firm's innovativeness and competitiveness.

6.0 What Inhibits Innovation?

There are many myths about innovation. Many organisations do not innovate and, as a result, fail to acquire a competitive edge. Some of the more common myths about innovation are (Mathur A, 2004).

• Innovation is more applicable to high-tech industries.

• Innovation means inventing new products.

• Innovation is doing research and development (R&D).

• Only big companies can afford to innovate.

• Innovation is good, but not a necessity.

As a result, many organisations do not innovate and, as a result, fail to acquire a competitive edge.

7.0 Criteria for Successful Innovation

Not all innovations are successful. In fact, there is an overwhelming failure rate of new products and ideas. Successful an innovation must meet the test of four challenging criteria (Doyle, 2001).

1. It must offer customer value.

A new product might possess superior technology but unless customers see it as offering them superior benefits they will not buy it. An atomic wristwatch with an accuracy of within one second in a hundred years will not sell because people would ask themselves - how would it help me and what could I do better with it? It is important to have consumer research very early in the development process to identify whether there is a potential market segment for the product.

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2. It must be perceived as unique.

A product might have unique technology but unless the benefits appear to be unique, it is unlikely to sell well. Inventors impressed by the originality of their technology often over-estimate the potential of their creation. For customers, it is not the uniqueness of technology which matters most because to them, the practicalitry and results matters.

3. It must be marketable

Innovation must find enough customers willing to pay prices sufficient to cover costs and to generate an economic surplus. The Concorde was a marvellous engineering accomplishment, being the world's first and still the only supersonic passenger aircraft but was too small and had skyrocket high operating costs. Airlines could see no way of making a fleet of Concordes a profitable venture.

4. It must be sustainable

An innovation should not be easily and quickly copied. Innovators must think about creating barriers to new entrants, and patents may provide such a barrier. Decisiveness in capturing market share is also important to monopolise the market. To enhance the product's uniqueness, many markets build brand because competitors may make a drink taste like Coca Cola but can never emulate is the Coca Cola brand value.

8.0 Conclusion: Challenge for Global Innovation

The real challenge for global innovation is R&D productivity and not R&D investment (Schrage M., 2005). Innovation is what customers actually adopt and not what innovators innovate. Productivity is not measured in patents granted but in new customers won and existing customers profitably retained. WalMart, Tesco and Dell have minuscule R&D budgets but their quality, procurement and growth requirements have probably done more to drive productive innovation investment. It is not growing R&D spending but rather growing market competition that drives innovation. Companies must see innovation as a cost-effective investment to differentiate themselves profitably.

The greatest competitive advantage of a business entity is its people and their shared values. Within an environment of shared values and engaged staff, an entrepreneur have the environment fertile to innovation. If precious time is not being spent putting out fires, this resource can be put to the creative, inspired talents of the entrepreneur and its staff.

Innovative companies are growing companies.

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9.0 Bibliography & References

Clow, K. E. & Baack, D (2001) Integrated Advertising, Promotion, & Marketing Communications. New Jersey: Prentice Hall. Wilson, Richard M. S. & Gilligan, Colin (1997) Strategic Marketing Management (2nd Edition). England: Butterworth-Heinemann. Harvard Business Review on Entrepreneurship, Amar Bhide: The Questions Every Entrepreneur Must Answer, (November-December 1996). Harvard Busines School Press. Marketing Insights, Doyle P: Marketing And Innovation. (January 2001)The Chartered Institute of Marketing (Asia Pacific) Pte. Ltd.: Singapore. http://www.microsoft.com/business/peopleready/news/fortune/innovation.mspx David Kirkpatrick & Gary Hamel (2004) Innovation Do's and Don'ts. Accessed October 12, 2006. http://www.thetimes100.co.uk/case_study.php?cID=28&csID=120&pID=5, Franchise & Entrepreneurship. Accessed October 12, 2006. http://www.ft.com/cms/s/b10da862-4ffb-11da-8b72-0000779e2340.html, Michael Schrage: For innovation success, do not follow where the money goes. Accessed October 12, 2006. http://www.thetimes100.co.uk/case_study.php?cID=28&csID=120&pID=5. Accessed October 12, 2006. http://www.atulmathur.com/articles/mythsaboutinnovation.html. Five myths about innovation: Disregard them improve your business, Accessed October 12, 2006. http://www.businessweek.com/magazine/content/06_20/b3984065.htm; May 15, 2006, News: Analysis & Commentary; Mickey D's McMakeover; Accessed October 12, 2006. http://brandautopsy.typepad.com/brandautopsy/2004/07/welcome_to_mcdo.html, Welcome to McDonald’s, may WE take your order? Accessed October 12, 2006