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Innovation
and Entrepreneurship |
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Introduction
There is a strong linkage between innovation and entrepreneurship. An entrepreneur shifts economic resources out of an area of lower into an area of higher productivity and greater yield. Entrepreneurs may not invent but they do innovate. There is nothing technical about innovation. One of the best examples of entrepreneurship is McDonald’s. It did not invent anything. Its final product was what any decent American restaurant had produced years ago. But by applying management concepts and management techniques, by standardizing the “product,” by designing processes and tools, by offering training and by setting the standards, McDonald’s both drastically upgraded the yield from resources, and created a new market and a new customer. This is the essence of entrepreneurship. Removing
some misconceptions There are various misconceptions about entrepreneurship. Small does not buy itself imply entrepreneurial management. To be entrepreneurial, an enterprise must have special characteristics over and above being new and small. Moreover, an enterprise does not need to be small and new to be an entrepreneur. Indeed, entrepreneurship can be practiced by large and often old enterprises. Entrepreneurship is by no means confined to economic institutions. Entrepreneurs are not capitalists, although they need capital to run their business. Entrepreneurs are not investors, either. They take risks, but so does anyone engaged in any kind of economic activity. The essence of economic activity is the commitment of present resources to future expectations, and that means uncertainty and risk. The entrepreneur is also not an employer, but can be, and often is, an employee or someone who works alone. Entrepreneurs, as mentioned earlier, shift resources from an area of low productivity and yield to an area of higher productivity and yield. There is always the risk they may not succeed. But if they are even moderately successful, the returns should be more than adequate to offset whatever, risk there might be. One should thus expect entrepreneurship to be considerably less risky than optimization. Indeed, nothing could be as risky as optimizing resources in areas where the proper and profitable course is innovation, that is, where the opportunities for innovation already exist. So, contrary to the popular notion, entrepreneurship should be the least risky rather than the most risky course. Entrepreneurship is widely perceived to be “risky” mainly because so few of the so-called entrepreneurs know what they are doing. They lack the methodology. They violate elementary and well-known rules. This is particularly true of high-tech entrepreneurs. Characteristics
of entrepreneurs Entrepreneurs have the most diverse personalities and temperaments. People who hate uncertainty are unlikely to make good entrepreneurs. But that is not saying much. For such people are unlikely to do well in a host of other activities as well in politics, for instance, or in command position in a military service, or as the captain of an ocean liner. In all such pursuits, decisions have to be made, and the essence of any decision is uncertainty. But someone who can face up to decision making can learn to be an entrepreneur. Entrepreneurship, is more about behavior rather than personality trait. And its foundation lies in concept and theory rather than in intuition. Entrepreneurship sees change as normal and indeed as healthy. And it sees the major task as doing something different rather than doing better what is already being done. Usually, entrepreneurs do not bring about the change themselves. But, they always search for change, respond to it, and exploit it as an opportunity. Systematic
innovations Entrepreneurs innovate. Innovation endows resources with a new capacity to create wealth. Innovation creates a resource or changes the wealth-producing potential of already existing resources. Innovation does not have to be technical. Few technical innovations can compete in terms of impact with such social innovations as the newspaper or insurance. The Japanese have produced few outstanding technical or scientific innovations. Their success is based on social innovation. Technology can be imported at low cost and with a minimum of cultural risk. Institutions, by contrast, need cultural roots to grow and to prosper. The Japanese made a deliberate decision a hundred years ago to concentrate their resources on social innovations, and to imitate, import, and adapt technical innovations – with startling success. Systematic innovation consists in the purposeful and organized search for changes, and in the systematic analysis of the opportunities such changes might offer for economic or social innovation. The overwhelming majority of successful innovations exploit change. To be sure, there are innovations that in themselves constitute a major change; some of the major technical innovations, such as the Wright Brothers’ airplane, are examples. But these are exceptions, and fairly uncommon ones. Contrary to the almost universal belief, new knowledge (especially new scientific knowledge) is not the most reliable or most predictable source of successful innovations. The mundane and unglamorous analysis of such symptoms of underlying changes as the unexpected success or the unexpected failure carry fairly low risk and uncertainty. Unexpected
successes and failures The unexpected success is a challenge to management’s judgment. Managements must realise that they are not infallible. In fact, they are being paid to realise and admit that they have been wrong especially when their admission opens up an opportunity. But often they do not do so. Few managers pay attention to the unexpected success. So, they do not exploit it, with the inevitable result that the competitor runs with it and reaps the rewards. For example, the pharmaceutical companies rejected the unexpected success of their new drugs in the animal market. This was a symptom of their own failure to understand how big and how important livestock raising throughout the world had become. It also reflected their blindness to the sharp increase in demand for animal proteins throughout the world after World War II, and to the tremendous changes in knowledge, sophistication, and management capacity of the world’s farmers. The
unexpected success should force
managers to ask, What basic
changes are now appropriate for this organization in the way it defines
its business? Its technology? Its markets? If these questions are faced
up to, then the unexpected success is likely to open up the most
rewarding and least risky of all innovative opportunities. Managements must look at every unexpected success with the following questions: · What would it mean to us if we exploited it? · Where could it lead us? · What would we have to do to convert it into an opportunity? · How do we go about it? The unexpected success is an opportunity that must be taken seriously. It must get the seriousness and support on the part of management equal to the size of the opportunity. The best people available, must be put on job. Failures, unlike successes, usually do not go unnoticed. If something fails despite being carefully planned, carefully designed, and conscientiously executed, it usually implies underlying change and opportunity. An unexpected product failure could be due to various reasons. The assumptions on which a product or service, its design or its marketing strategy, were based, may no longer fit reality. Perhaps customers have changed their values and perceptions. They may be buying the same “thing” but they are actually purchasing a very different “value.” May be what has traditionally been one market is splitting into segments, each demanding a different value preposition. Any change like this is an opportunity for innovation. Incongruities An incongruity is a discrepancy, between what is and what “ought” to be, or between what is and what everybody assumes it to be. Managers may not understand the reason for it; indeed, they often cannot figure it out. Still, an incongruity is a symptom of an opportunity to innovate. If the demand for a product or a service is growing steadily, it should be profitable. A lack of profitability in a growing industry is an example of incongruity. The innovation that capitalizes on an incongruity between economic realities has to be simple rather than complicated, obvious rather than grandiose. Whenever the people in an industry or a service misconceive reality, or make erroneous assumptions, their efforts will be misdirected. They will concentrate on the wrong area. Then there is an incongruity between reality and behaviour. Again there is an opportunity for successful innovation to whoever can perceive and exploit it. Producers and suppliers almost always misconceive what it is the customer actually buys. They assume that what represents “value” to the producer and supplier is equally “value” to the customer. Process
need Process need, unlike the other sources of innovation, starts with the job to be done. It is task-focused rather than situation-focused. It perfects a process that already exists, replaces a link that is weak, redesigns an existing old process around newly available knowledge. Sometimes it makes possible a process by supplying the “missing link.” Changing
industry and market structures
If an industry grows significantly faster than the economy or population, it is highly probable that its structure will change drastically at the very latest by the time it has doubled in volume. Another development that is likely to result in sudden changes in industry structure is the convergence of technologies that hitherto were seen as distinctly separate. An industry is also ripe for change if the way in which it does business changes rapidly. When market or industry structure changes, the producers or suppliers who are today’s industry leaders often neglect the fastest-growing market segments. They cling to practices that are rapidly becoming dysfunctional and obsolete. The new growth opportunities rarely fit the way the industry has “always” approached the market, been organized for it, and defines it. The innovator in this area therefore has a good chance of being left alone. Demographics Changes in perception If general perception changes from seeing the glass as “half full” to seeing it as “half empty,” there are major innovative opportunities. In exploiting changes in perception, “creative imitation” does not work. One has to be first. But precisely because it is so uncertain whether a change in perception is temporary or permanent, and what the consequences really are, perception-based innovation has to start small and be very specific. New knowledge Knowledge-based innovation has the longest lead time of all innovations. There is, usually a long time span between the emergence of new knowledge and its becoming applicable to technology. There is often a long period before the new technology turns into products, processes, or services in the marketplace. The lead time for knowledge to become applicable technology and being accepted on the market is between 25 and 35 years. Knowledge-based innovations are usually not based on one factor but on the convergence of several different kinds of knowledge, not all of them scientific or technological. For example, the Wright Brothers’ airplane had two knowledge roots. One was the gasoline engine, designed in the mid-1880s to power the first automobiles built by Karl Benz and Gottfried Daimler, respectively. The other one was aerodynamics, developed primarily in experiments with gliders. The computer, required the convergence of various kinds of knowledge: a scientific invention, the audion tube; a major mathematical discovery, the binary theorem; a new logic; the design concept of the punchcard; and the concepts of program and feedback. Until all the needed branches of knowledge can be provided, knowledge-based innovation is premature and will fail. In most cases, the innovation occurs only when these various factors are already known, are already available or are already in use some place. Sometimes the innovator can identify the missing pieces and then work at producing them. Indeed, until all the types of knowledge converge, the lead time of a knowledge-based innovation usually does not even begin. Knowledge based innovation requires a careful analysis of all the necessary factors, whether knowledge itself, or social, economic, or perceptual factors. The analysis must identify what factors are not yet available so that the entrepreneur can decide whether these missing factors can be produced or whether the innovation must be postponed since it is not feasible. Scientists and technologists are reluctant to make these analyses precisely because they think they already know. That is why, in cases of many great knowledge-based innovations a layman rather than a scientist or a technologist has led the initiative. The fact that the introduction of the innovation creates excitement, and attracts several other players, means that the innovator has to be right the first time. He is unlikely to get a second chance. In all the other innovations, the innovator can expect to be left alone for quite some time. This is not true of knowledge-based innovation. Here the innovators almost immediately have far more company than they want. They may lose out even if they stumble once. There can be three basic approaches for knowledge-based innovation. First is to develop a complete system that can dominate the field. The second is a sharp market focus. The third approach is to occupy a strategic position, concentrating on a key function. Because the inherent risks of knowledge-based innovation are so high, entrepreneurial management is both necessary and effective. The knowledge-based innovator needs to learn and to practice entrepreneurial management. The combination of the two characteristics of knowledge-based innovations – long lead times and convergences – gives knowledge-based innovations their peculiar rhythm. For a long time, there is awareness of an innovation about to happen – but it does not happen. Then suddenly there is a near-explosion, followed by a few short years of tremendous excitement, tremendous startup activity and tremendous publicity. A few years later comes a “shakeout,” which few survive. But each time the survivor is usually a company that was started during the early explosive period. There is a “window” of a few years during which a new venture must establish itself in any new knowledge-based industry. After that period is over, entry into the industry is foreclosed for all practical purposes. To be successful, a knowledge-based innovation has to be “ripe”. It must gain receptivity. All other innovations exploit a change that has already occurred. They satisfy a need that already exists. But in knowledge-based innovation, the innovation brings about the change. It aims at creating a want. And no one can tell in advance how the user will respond. The risks are highest in innovations based on new knowledge in science and technology. They are particularly high, of course, in innovations in areas that are currently “hot” – personal computers, or biotechnology. By contrast, areas that are not in the public eye have far lower risks, if only because there is more time. And in innovations, where the knowledge base is not science or technology, social innovations for instance – the risks are lower still. There is risk in knowledge-based innovation because of its impact and above all for its capacity to bring about change, not only in products and services but in how we see the world, our place in it, and eventually ourselves. The bright idea Innovations based on a bright idea probably outnumber all other categories taken together. Seven or eight out of every ten patents belong here, for example. Yet bright ideas are the riskiest and least successful source of innovative opportunities. The casualty rate is enormous. Only one out of every hundred patents earns enough to recover development cost and patent fees. A far smaller proportion, perhaps as low as one in five hundred, makes any money above its out-of-pocket costs. The entrepreneur is well advised to forgo innovations based on bright ideas. Systematic, purposeful entrepreneurs analyze the seven areas discussed earlier. There is enough, probably more than can exploited, in these areas to keep busy any one individual entrepreneur and any one entrepreneurial business or public-service institution. Principles of Innovation Purposeful, systematic innovation begins with an analysis of the opportunities. Innovation demands going out to look, to ask, to listen. Successful innovators use both the right side and the left side of their brains. They look at figures, and they look at people. They work out analytically what the innovation has to be to satisfy an opportunity. And then they go out and look at the customers, to see what their expectations, values and needs are. To be effective, an innovation has to be simple and focused. It should do only one thing, otherwise, it confuses. If it is not simple, it won’t work. Everything new runs into trouble; if complicated, it cannot be repaired or fixed. All effective innovations are breathtakingly simple. Indeed, the greatest praise an innovation can receive is for people to say: “This is obvious. Why didn’t I think of it? Effective innovations start small. They are not grandiose. They try to do one specific thing. Innovations should at first require little money, few people, and only a small and limited market. Otherwise, there is not enough time to make the adjustments and changes that are almost always needed for it to succeed. A successful innovation must aim at leadership from the beginning. Otherwise, it is unlikely to be innovative enough, and therefore, unlikely to be capable of establishing itself. Innovators should not try to be too clever. Innovations have to be handled by ordinary human beings, and if they are to attain any size and importance at all. Innovators should not diversify, not splinter, not try to do too many things at once. Innovations that stray from a core are likely to become diffuse. They remain ideas and do not become innovations. Whatever the benefits of diversification, it does not mix with entrepreneurship and innovation. Attempts to innovate in an area one does not understand are likely to fail. Innovators must have their feet firmly planted on the ground. They must innovate for the present, not for the future. Innovation requires knowledge and ingenuity. It also involves hard, focused, purposeful work making very great demands on diligence, on persistence, and on commitment. If these are lacking, no amount of talent, ingenuity, or knowledge will be adequate. Successful innovators look at opportunities over a wide range. Then they examine these opportunities in terms of their strategic fit and the organization’s internal capabilities. Innovators need to be temperamentally attuned to the innovative opportunity. It must be important to them and make sense to them. Otherwise they will not be willing to put in the persistent, hard, frustrating work that successful innovation always requires. Innovation is an effect in economy and society, a change in the behavior of people in general. It might also be a change in a process that is, in how people work and produce something. Innovation must always be market focused and market-driven. Contrary to popular perception, entrepreneurs are not risk-loving people. Rather, they define risks and confine them. They are successful to the extent to which they systematically analyze the sources of innovative opportunity, then pinpoint the opportunity and exploit it. Successful innovators are conservative. They are not risk-focused, but opportunity-focused. The Entrepreneurial Business The new, major innovations of this century did not come out of the old, large businesses of their time. But the contention that large businesses cannot innovate is not quite true. It is the existing business and the fair-sized rather than the small one that has the best capability for entrepreneurial leadership. It has the necessary resources, especially the human resources, the managerial competences and a management team. Large size is not an obstacle to entrepreneurship and innovation. It is not size that is an impediment to entrepreneurship and innovation; it is the existing operation itself, and especially the existing successful operation. And it is easier for a big or at least a fair-sized company to surmount this obstacle than it is for a small one. It takes special effort for the existing business to become entrepreneurial and innovative. The “normal” tendency is to allocate productive resources to the existing business, to the daily crisis, and to getting a little more out of the activities already in place. The temptation in the existing business is always to feed yesterday and to starve tomorrow. But entrepreneurship is not “natural”; it is not “creative.” It is work. Entrepreneurial businesses look at entrepreneurship as a duty. They are disciplined about it. They work at it. Systematic measurement or at least appraisal of a company’s performance as entrepreneur is mandatory. Entrepreneurial management requires specific practices pertaining to organizational structure, to staffing and managing, and to compensation, incentives, and rewards. Practicing
innovations Nothing motivates a manager to innovate better than the realisation that the present product or service will be abandoned within the foreseeable future. There is only one way to make innovation attractive to managers: a systematic policy of abandoning whatever is outworn, obsolete, no longer productive, as well as the mistakes, failures and misdirections of effort. Every three years or so, the enterprise must put every single product, process, technology, market, distributive channel, not to mention every single internal staff activity, on trial for its life. For a business to be receptive to entrepreneurship, its entrepreneurial performance must be regularly assessed. The first step builds into each innovative project feedback from results to expectations. This indicates the quality and reliability of both the plans to innovate and the actual efforts. The next step is to develop a systematic review of innovative efforts all together. Every few years an entrepreneurial management looks at all the innovative efforts of the business. Which ones should receive more support at this stage and should be pushed? Which ones have opened up new opportunities? Which ones, are not doing what they were expected to do, and what action should be taken? Should they be abandoned? Or has the time come to redouble efforts but with different expectations and deadline? Finally, entrepreneurial management entails judging the company’s total innovative performance against the company’s innovation objectives, against its performance as a business all together. Innovation cannot usually be entrusted to people charged with running, exploiting, optimizing what already exists. The entrepreneurial initiative has to be organized separately from the old and existing. It is difficult to make an existing unit the carrier of the entrepreneurial project. The new always looks so puny. Even though, by virtue of its current size, revenues, and markets, it does not rank with existing products, somebody in top management must have the specific assignment to work on tomorrow as an entrepreneur and innovator. A new, innovative effort must also be set up separately. It is almost always futile to avoid making one’s own business entrepreneurial by “buying in,” that is, acquiring small entrepreneurial ventures. Acquisitions rarely work unless the company that does the acquiring will be able within a fairly short time to furnish management to the acquisition. The service institution There are three main reasons why the existing enterprise presents so much more of an obstacle to innovation in the public-service institution than it does in the typical business enterprise. First, the public-service institution focuses on a “budget” rather than on results. Second, a service institution is dependent on a multitude of constituents. A public-service institution has to satisfy everyone; certainly, it cannot afford to alienate anyone. The most important reason, however, is that public-service institutions exist to “do good.” So they tend to see their mission in moral rather than in economic terms. Whether it succeeds or fails, the demand to innovate and to do something else will be resented as an attack on its basic commitment, on the very reason for its existence, and on its beliefs and values. The new venture For the existing enterprise, whether business or public-service institution, the controlling word in the term “entrepreneurial management” is “entrepreneurial.” For the new venture, it is “management.” In the existing business, it is the existing that is the main obstacle to entrepreneurship. In the new venture, it is its absence. A new venture more often than not succeeds, in a market other than the one it was originally intended to serve, with products or services not quite those with which it had set out. Its products are often bought by customers it did not even think of when it started, and used in totally unanticipated applications. A new venture must anticipate this and organize itself to take advantage of the unexpected and unseen markets. If it is not totally market-focused, it will only succeed in creating an opportunity for a competitor. Entrepreneurs know what their innovation is meant to do. And if some other use for it appears, they tend to resent it. They may not actually refuse to serve customers they have not “planned” for, but they may not take them seriously enough. The new venture must systematically hunt out both the unexpected success and the unexpected failure. Rather than dismiss the unexpected as an “exception,” entrepreneurs need to look at it carefully as a distinct opportunity. The new venture must also be willing to experiment. If there is any interest in the new venture’s product or service on the part of consumers or markets that were not in the original plan, it must try to find somebody in that new and unexpected area who might be willing to test the new product or service and find out what, if any, application it might have. The lack of adequate financial focus and wrong financial policies constitute the greatest threat to the new venture in the next stage of its growth. It is, especially a threat to the rapidly growing new venture. The more successful a new venture is, the more dangerous the lack of financial foresight. A growing new venture should know at least a year before how much cash it will need. With a year’s lead time, it is almost always possible to finance cash needs. Raising cash in a hurry and in a “crisis” is never easy and always prohibitively expensive because it sidetracks the key people in the company at the most critical time. For several months they have to spend their time and energy running from one financial institution to another and working out one set of questionable financial projections after another. In the end, they usually have to compromise the long-range future of the business to get through a temporary liquidity squeeze. When they finally are able to devote time and thought to the business, some major opportunities might have passed by. For the new venture, almost by definition, is under cash pressure when the opportunities are greatest. To avoid such complications, a top management team must be built before the venture reaches the point where it must have one. Teams cannot be formed overnight. They require long periods before they can function. Teams are based on mutual understanding, and this takes years to build up. Only two key activities are always present in any organization: the management of people and the management of money. The rest has to be determined by the people with looking at the enterprise and at their own jobs, values, and goals. Freedom without law degenerates into anarchy, and shortly thereafter into tyranny. It is precisely because the new venture has to maintain and strengthen the entrepreneurial spirit that it needs foresight and discipline. It needs to prepare itself for the demands its own success will make of it. Fustest
with the Mostest In
this strategy the entrepreneur aims at leadership, if not at dominance
of a new market. “Fustest with the Mostest” requires an ambitious
aim; otherwise it is bound to fail.
It always aims at creating a new market. Perhaps because “Fustest with the Mostest” must aim at creating something truly new and truly different, nonexperts and outsiders seem to do as well as the experts. In fact, they often do better. This strategy has to hit right on target or it misses altogether. And once launched, it is difficult to adjust or to correct. Using this strategy, involves thought and careful analysis. After the innovation has become a successful business, the work really begins. Then the strategy of “Fustest with the Mostest” demands substantial and continuing efforts to retain a leadership position. Otherwise, one ends up creating a market for a competitor. Hit Them Where They Ain’t What the entrepreneur does here is something somebody else has already done. But it is “creative” because the entrepreneur understands what the innovation represents than the people who first innovated. Like being “Fustest with the Mostest,” creative imitation is a strategy aimed at market or industry leadership, if not at market or industry dominance. But it is much less risky. By the time the creative imitator moves, the market has been established and the new venture has been accepted. Indeed, there is usually more demand for it than the original innovator can easily supply. The market segmentations are known or at least knowable. Creative imitation, does not exploit the failure of the pioneers. On the contrary, it takes advantage of the success of the pioneer. Creative imitators do not succeed by taking away customers from the pioneers who have first introduced a new product or service. They serve markets the pioneers have created but do not adequately service. The creative imitator does not invent a product or service; he perfects and positions it. In the form in which it has been introduced, it lacks something. It may be additional product features. It may be segmentation of product or services so that slightly different versions fit slightly different markets. It might be improper positioning of the product in the market. Creative imitation might also supply something that is still lacking. Creative imitation starts out with markets rather than with products, and with customers rather than with producers. It requires a rapidly growing market. The strategy has its own downsides. Creative imitators are easily tempted to splinter their efforts in the attempt to hedge their bets. Another danger is to misread the trend and imitate what turns out to be the winning development in the market place. Creative imitation is likely to work most effectively in high-tech areas because high-tech innovators are least likely to be market-focused, and most likely to be technology and product-focused. Entrepreneurial
judo Entrepreneurial judo aims fist at securing a beachhead, which the established leaders either do not defend at all or defend only halfheartedly. Once that beachhead has been secured , the newcomers move on to the rest of the “beach” and finally to the whole “island.” Entrepreneurial judo requires some degree of genuine innovation. It is, as a rule, not enough to offer the same product or the same service at lower cost. There has to be something that distinguishes it from what already exists. There are five fairly common bad habits that enable newcomers to use entrepreneurial judo and to catapult themselves into a leadership position in an industry against the entrenched, established companies.
Ecological
Niche The ecological niche strategy aims at obtaining a practical monopoly in a small area. Successful practitioners of the ecological niche wallow in their anonymity. The whole point is to be so inconspicuous, despite the product’s being essential to a process, that no one is likely to try to complete. There are various variations of this strategy. The toll-gate position is in many ways the most desirable position a company can occupy. But it has stringent requirements. The product has to be essential to a process. The risk of not using it – must be infinitely greater than the cost of the product. The market must be also limited so that whoever occupies it first preempts it. The toll-gate position also has severe limitation and serious risks. It is basically a static position. Once the ecological niche has been occupied, there is unlikely to be much growth. A specialty skill niche results from a systematic survey of innovative opportunities. Typically, the entrepreneur looks for the place where a specialty skill can be developed and can give a new enterprise a unique controlling position. The specialty skill niche requires a skill that is both unique and different. A business occupying a specialty skill niche must constantly work on improving its own skill. It has to stay ahead. Indeed, it has to make itself constantly obsolete. The specialty market is found by looking at a new development with the question, What opportunities are there in this that would give us a unique niche, and what do we have to do to fill it ahead of everybody else? Timing is crucial in establishing a specialty skill niche. It has to be done at the very beginning of a new industry, a new custom, a new market, a new trend. Conclusion Manufacturers are wont to talk to the “irrational customer”. But there are no “irrational customers.” As an old saying has it, “There are only lazy manufacturers.” An innovation is a change in market or society. It produces a greater yield for the user, greater wealth-producing capacity for society, higher value and greater satisfaction. The test of an innovation is always what it does for the user. Hence, entrepreneurship always needs to be market-focused, indeed, market-driven. Innovation must be purposeful. But innovation, almost by definition, has to be decentralized, ad hoc, autonomous, specific, and micro-economic. Planning as the term is commonly understood is actually incompatible with an entrepreneurial society and economy.
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