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1. Is it a new combination?

The new approach to venturing taken here (venturing success through failure prevention) begins with understanding entrepreneurial discovery within the context of the free enterprise system. In the free enterprise system, two major categories of entrepreneurial discovery exist. They are:

1. Scientific discovery, and
2. Circumstantial discovery.

Circumstantial discovery refers to insight that is obtained though specific knowledge of time, place, or circumstance. Circumstantial discovery yields an opportunity simply because of what (whom) and when you know something of economic value.

Profit opportunities occur because there are "imperfections" in the marketplace. The two basic market imperfections are:

1. Demand without supply, and
2. Supply without demand

Figure A-1

1. Invention I

Where excess demand already exists, the job of the scientist seeking an entrepreneurial opportunity is to discover and apply the laws of nature such that a means is found to satisfy that excess demand. Take, for example, controlled flight. For millennia, man (observing birds) has had the desire to fly. By constant experimentation, a means to satisfy this demand was eventually discovered. The timing of this type of discovery, however, is constrained by the scientific environment. New developments in one field can and do have ripple effects in others. Thus, without the internal combustion engine, the capability to refine fuel, the ability to produce lightweight fabrics etc., the Wright brothers could not have "invented" a solution to the physical problem of controlled flight.

2. Observation

Of course it was left to others to observe that "barnstorming" was not the only use for the new flying machines. First came military applications. Then came freight and passenger service. The airline industry of today is built upon the insights of time, place, and circumstance that came from the careful observations of entrepreneurs who took the scientific discoveries and applied them to specific uses. But observation is not restricted to the application of scientific inventions. One short story involving entrepreneurial discovery often studied in elementary school goes as follows:

Once there was a man who was bored with his job as a clerk, working in downtown London. One day, he was so frustrated with his "going nowhere" job that instead of going to the lunch room on his noon break, he went for a walk to think things over. As he strolled along the streets of that part of London, he (being a pipe smoker) decided to buy some tobacco. He walked first one, then two, then three full blocks looking for a tobacconist's shop and found none. Then, with that special insight that comes from individual knowledge of time, place and circumstance, he suddenly realized that in his frustration at not finding a place to buy tobacco for his pipe, he had discovered the solution to his job problem.

He promptly returned to his place of employment, quit his job, and opened a tobacco shop on the street he had previously strolled. The shop was an almost instant success. Soon, he took to strolling the streets of London looking for other stretches of city street that did not have a tobacconist within a reasonable distance. Eventually he became the owner of a chain of these shops, and a wealthy man. Here we see how the observations of a particular individual whose knowledge of place, time, and circumstance produced an entrepreneurial discovery. Of course, such discovery is not the only thing that is necessary for a successful new venture, but it does form the foundation of a new business.

3. Invention II

The second way in which scientific discovery can give rise to entrepreneurial opportunity, is where inventions create demand for an excess of supply that already exists. For example, an abundant supply of silica sand has existed since time began. Yet only recently has the scientific community discovered ways to process this material such that its value increases astronomically. Presently, several million transistors can be placed on a single silicon chip. Here scientific discovery provides entrepreneurial opportunity from the market imperfection: supply without demand.

4. Coordination

The knowledge of time, place and circumstance that permitted Sam Walton to see the vision of Wal-Mart, is an excellent illustration of how non-scientific entrepreneurial discovery can capitalize upon the market imperfection supply without demand. As a small discount retailer, Walton realized that most producers were not operating at peak capacity (supply without demand). His concept was to cut his costs by buying from producers at a price that barely exceeded their marginal costs, and then to locate in communities where his lower prices could generate a satisfactory level of volume. His success at coordinating excess supply with a demand that he knew existed (because of circumstantial information) is legendary.

Where a market imperfection occurs, and where individuals possess either the scientific or circumstantial knowledge to utilize that imperfection, a profit opportunity results. Discovering these matches is the essence of entrepreneurship.

The new combinations mentioned earlier in this topic review note can occur within each of these areas of entrepreneurial discovery. Schumpeter (1936) describes five kinds of new combination:

1. The introduction of a new good or a new quality of a good,
2. The introduction of a new method of production,
3. The opening of a new market,
4. The conquest of a new source of supply of raw materials or components, or
5. The reorganization of any industry.

New or improved

The most common innovations are products/services that are new, or products/services that have been improved--most often improved from a quality standpoint. In the case of the micro-chip, the creation of the first chip made it a new combination. The improvement that have made these chips successively faster are improvements that also qualify as new combinations. Also worth noting--the current emphasis on "quality" can often result in new combinations. Where product/service quality is dramatically increased through improvements to the quality system of a business, a new combination may result.

It is important, however, to make the distinction in our minds between "true" advances in product/service or quality, and "promotional" differences. The introduction of the automobile, or the addition of in-auto air conditioning are examples of a truly new and a truly improved product. Claims of "smoother ride" or "new and improved styling" are somewhat dubious as new combinations, and as such would be considered to be low in innovation.

New method of production

A "new combination" occurred when Henry Ford introduced the assembly line method of production in the early years of the automobile industry. This act was innovative because, with the added efficiency of the assembly line, the cost of producing cars dropped dramatically, thus endowing existing resources with new wealth-producing capacity and qualifying mass production as an innovation according to Drucker's definition.

Interestingly, this type of new combination is often underrated by the venturing community in general, because many of these improvements are made by engineers. But, using Schumpeter's definition of the entrepreneur, these new combinations are just as important--and everyone involved in bringing them about should be considered to be acting entrepreneurially during the time of production innovation.

The opening of a new market

Was Christopher Columbus a business innovator? Certainly he "opened a new market" by discovering the Americas. But was that enough to make his discovery a new combination? Perhaps a better definition of opening markets is needed. Since we are trying to describe the kinds of innovations that propel new ventures forward, we need a more comprehensive definition.

The opening of markets involves more than just discovery. In fact, the opening of a market in an increasingly globalized society is often an undertaking that is quite complex. In addition to discovery, it requires an understanding of culture, laws, local buyer preferences and business practices, and a host of contact, communication, and transportation details we refer to as "setting up a distribution channel."

Thus, when Honda began to market its smaller, modestly powered motorbikes to US and Canadian consumers, it established a distribution channel to a body of buyers who would not even consider purchasing a heavy, high-powered motorcycle. By opening this market, Honda created a new combination, and was therefore innovative.

This function is of such importance that it justifies its own sub-question under the innovation heading. More will be said later about the importance of the product-market match, which is really a question about whether a new market exists or not. Without a market for the product/service, a venture cannot truly be said to be a business. Rather, it is more properly classified as a "research project," or as a "charity."

The conquest of a new source of supply of raw materials or components

Any time the cost structure of a product/service can be reduced significantly, or its availability enhanced without compromising quality, a new combination is present. As human beings, our wants, and therefore the opportunities for business are quite predictable. These needs have been said to revolve around food, shelter, safety, social, ego and self-actualization (Maslow, 1954). Thus, anyone who can find a way to supply the basic ingredients for satisfying these wants more cheaply or in more abundance (which often amounts to the same thing) has created a new combination.

For example, the discovery and securing of access to the huge petroleum reserves of the Persian Gulf region was a new source of supply combination that helped to satisfy human needs for food and shelter. (In fact, an in-depth look at the petrochemical industry would likely reveal ways in which petroleum affects each level in Maslow's needs hierarchy.) The movement of manufacturing facilities from high to low labor cost regions of the world would also qualify as a new source of supply combination, as would the development of word-processing technology to replace the typewriter. Each of these examples illustrates how new sources of supply or new components for items that satisfy human wants can be provided in more abundance, thus endowing existing resources with new wealth producing capacity. Therefore, they qualify as innovations.

The reorganization of an industry

When the US Department of Justice undertook to "break up the Bell System," did it create a new combination? Undeniably, the marketplace was reorganized. But whether or not its wealth producing capacity was enhanced is still an open question in some circles.

So when Schumpeter asserts that reorganizing an industry constitutes a new combination, he is more likely to be pointing to a much more basic, and market-driven activity than government intervention in an economic system. Likely, the activity that should be considered to be the "new combination" is a re-organization similar to the one that took place when Jobs and Wozniak, in launching the personal computer, also launched a fundamental change in the computer industry. To be sure, there were many others involved in this reorganization, but the net resulting change in emphasis--away from the inaccessible mainframe based computer systems, to the relatively accessible microcomputer--can properly be classified as a new combination.

New combinations: Summary

Of course each of the above types of new combination may vary in the level of innovation present. This, to some extent, is a judgment call, which should be made by comparing your idea to products/services in the same category. So if you have an idea for a new computer game, you could judge its new combination level by examining how closely it imitates existing products/services of the same type. If the "true" (not imagined) differences are great, then the new combination level is high. If your computer game idea is very similar to games that are presently in existence, then its new combination level is low.

Wherever the new combination level is low, the answer to Question A: Is it Innovative? is NO -- which means DON'T GO ON if you are STARTING a venture, until the new combination problem is resolved!

If your venture is already an operating business, and the level of "new combination" is low, this is the place to begin to improve your venture. Use the possibilities identified in Figure A-1, to "discover" combinations of products and services that "improve" upon, or even make a "break through" in your industry. If this seems to be impossible, you should begin to search for "circumstances" or "science" that fit the market imperfections (supply without demand, and demand without supply). This could mean that you improve your education, or hire staff with complementary skills to yours.

Don't settle for a low "new combination" rating, because a new combination is the foundation of a thriving venture. All the remaining questions and suggestions depend upon your achieving a medium to high level of uniqueness in your product or service. So if your business is already in operation, don't stop here, START WORK and discover the new or better combination that will help you to build a better venture.