How to Harness Joseph Schumpeter's 'Forgotten' Path to Innovation: Organization

How to Harness Joseph Schumpeter's 'Forgotten' Path to Innovation: Organization
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Entrepreneur Leadership Network Contributor
Assistant Professor of Entrepreneurship and Records-Johnston Professor
5 min read
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The influence of technology has seeped into almost every facet of life: Consumers are using augmented reality to catch cute monsters in parks and on city streets via “Pokémon GO.” Brands are scrambling to build products to capitalize on the Internet of Things craze. Teenagers are attached at the hip to their smartphones.

Related: 4 Things Non-Tech Leaders Do Better Than the Cyber-Obsessed

And  politicians are obsessed with getting more students into STEM education. 

Considering technology's rapid advance, this is perhaps to be expected. But it is also unfortunate. A new app can indeed bring riches and change lives, but for a budding entrepreneur, it may well be a poor focus. Doing what everyone else is doing makes growth that much more difficult; the competition is overwhelming.

Sometimes, in fact, innovation requires a touch of mundaneness. 

Economist Joseph Schumpeter (1883-1950) known for viewing the entrepreneur as an innovator who brings about “creative destruction” in capitalism, noted five particular ways to change the market. Entrepreneurs, in his view, could:

  • launch a new type or version of a product 
  • introduce new methods of production 
  • open new markets 
  • find or acquire new sources of supply
  • introduce new organization 

Whereas the first four were, and are, obvious, the fifth, organization, has generally been ignored or forgotten. But it is immensely important.

Although such entrepreneurial successes as Henry Ford’s automobile and Jeff Bezos’ Amazon have been hailed as technological innovations, the factor that made these companies great wasn’t primarily technology; it was organization. By rethinking supply chains and factory operations, these innovators reduced overhead and lead times while improving service to customers.

Organizational innovation, in fact, may be even more important to startup success than product innovation. Nobody doubts that Quirky, for example, had an innovative product: Starting in 2009, the startup built a much-loved, one-of-a-kind platform where inventors could workshop one another’s creations. But the startup failed to organize effectively. Unable to find cost-effective structures for engineering, manufacturing, marketing and retailing, the company went belly-up in late 2015.

Sadly, that outcome could have been very different had innovation through organization -- to fight stagnation -- been properly used. 

To bring the power of organizational innovation to your startup, ask yourself the following three questions:

1. 'Why do we use the business model that we use?'

We unconsciously default to using the same company structures we always have, even when they have no value: That’s why the taxi business remained unchanged for decades: Nobody thought to question the model. 

Until Uber came along. Uber’s chief innovation was not its app: It was that the ridesharing brand chose to outsource drivers, adding flexibility, scalability and cost efficiency to its operation. Even Amazon is following Uber's lead, having developed Amazon Flex, an Uber-like program for delivery drivers. With Amazon Flex, contracted drivers traverse Seattle using an Android app to coordinate pick-ups at mini-warehouses and drop-offs at customers’ residences. 

2. 'Can we rethink team operations?'

Doing things differently doesn’t mean adding computers and technology; it means fundamentally altering operations. Teams hardly ever need to operate in one particular way, so why not experiment to find the most effective manner?

Toyota, recognized by Consumer Reports as the world’s most reliable automaker, has a secret weapon on its assembly lines: zenjidoka. Derived from the Japanese jidoka, which means “to apply the human touch,” this principle encourages Toyota workers to halt the assembly line whenever they detect a quality problem.

When anyone pulls a red cord, the line stops, and fellow workers rush to that person to help resolve the defect. While this might sound like a large expenditure of employee time, the problem resolution often takes less than a minute before the line is restarted.

3. 'Is this about value or about control?'

The two previous questions can help sniff out new business models and production processes, but they’re not enough. Startups are uncertain businesses, and entrepreneurs’ knee-jerk response is to control whatever situation they find themselves in. But this is the equivalent of a caveman speaking, not a businessman. "Control" is a fiction. Worse, it hinders innovation and improvement.

Your objective should be to let go of fear by trying a “just crazy enough to succeed” process over something safe. Organizational innovation can come from anywhere, so think through every bit -- every fiber -- of your business. Bureo has taken this literally by recycling nylon fishnets to build sunglasses and skateboards. Software company 2HB provides employees with a $50 monthly grooming budget, in the expectation that improved appearances may bring more sales. Disney has rethought such issues as how employees point at guests, in order to help visitors from all  cultures feel welcome. 

Related: How to Build Innovation Into Your Business Without Creating Chaos

In my own industry, higher education, innovative institutions have used technology to spur organizational change. Until the advent of massive open online courseware, the university model had remained essentially unchanged since the 16th century. The big opportunity, these institutions realized, wasn't in adding online classrooms, but in fundamentally restructuring how we approach adult education.

In the end, then, comfort and complacency are what keep us doing things the way they’ve always been done. But that mindset leads us to neglect Schumpeter’s fifth source of disruptive innovation. That produces stasis rather than improvement.

And, when you think about it, isn’t it rather un-entrepreneurial of us to accept things the way they are?

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