MANAGING INNOVATION

Managing Innovation

•Innovation is the process and outcome of creating something new, which is also of value.

•Innovation involves the whole process from opportunity identification, ideation or invention to development, prototyping, production marketing and sales, while entrepreneurship only needs to involve commercialization (Schumpeter).

 
 •Today it is said to involve the capacity to quickly adapt by adopting new innovations (products, processes, strategies, organization, etc)

•Also, traditionally the focus has been on new products or processes, but recently new business models have come into focus, i.e. the way a firm delivers value and secures profits.

•Schumpeter argued that innovation comes about through new combinations made by an entrepreneur, resulting in

–a new product,

–a new process,

–opening of new market,

–new way of organizing the business

–new sources of supply

•Gary Hamel argued that today’s market place is hostile to incumbents, who now needs to conduct radical business innovation:

–Radically reconceiving products and services, not just developing new products and services

–Redefining market space

–Redrawing industry boundaries

•“Companies achieve competitive advantage through acts of innovation. They approach innovation in its broadest sense, including both new technologies & new ways of doings things”

-Michael Porter

Innovation has to be actively managed:

“Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or service. It is capable of being presented as a discipline, capable of being learned, capable of being practiced”

  - Peter Drucker

•Innovation is consistently found to be the most important characteristic associated with success.

•Innovation enterprises typically achieve stronger growth or are more successfully than those that do not innovate.

•Enterprises that gain market share and increasing profitability are those that are innovative.

 

Innovation and Performance

Some ‘stylised facts’ about the relationships between innovation and performance:

•Relationships between R&D, patents, new products and performance are strongest at the industry level, weakest at the firm level

•Returns from process innovation are typically four times those from product innovation

•R&D expenditure stronger than patents in predicting performance

•At firm level, R&D and new products both associated with higher value-added and market to book values

 

Innovation and Performance

•Returns from use of new technology higher than from its generation

•Highest variability in performance is at firm level

•Senior management typically accounts for 15-50% of variance

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Sources: J. Bessant & J. Tidd (2007) Innovation and Entrepreneurship (Wiley); J. Tidd (2006) From Knowledge Management to Strategic Competence (Imperial College Press, 2nd edition); J. Tidd, J. Bessant & K. Pavitt (2005) Managing Innovation: Integrating technological, market & organizational change (Wiley, 3rd edition); S. Isaksen & J. Tidd (2006) Meeting the Innovation Challenge: Leadership for Transformation and Growth (Wiley, 2006).

Innovation and Performance

Innovation has an inherent variability, but rate of success can be improved through better & different management:

•85% of new ideas never reach a market

•60% of R&D projects are market failures

•40% of consumer products & services fail

•20% of business products & services fail

Innovation and Performance

Some explanations for the observed wide variation in the relationships between innovation and performance:

•Scale – of technological inputs – critical mass; and market value of commercial outputs – ‘complementary assets’

•Opportunity – ‘spill-overs’ within sectors and between firms

•Management – differences in cognition, co-ordination and control

 

Drivers for innovation

–Financial pressures to reduce costs, increase efficiency, do more with less, etc

–Increased competition

–Shorter product life cycles

–Value migration

–Stricter regulation

–Industry and community needs for sustainable development

–Increased demend for accountability

–Demographic, social and maket changes

–Rising customer expectations regarding service and quality

–Changing economy

–Greater availability of potentially useful technologies coupled with a need to exceed the competition in these technologies

 

New conditions for innovation

•Small start-up entrepreneurs increasingly depend on large firms:

–as suppliers or customers

–for venture finance,

–for exit opportunites,

–for knowledge (production, markets and R&D)

–and for opening new markets.

 New conditions for innovation

•Large firms increasingly depend on small start-ups

–for NPD,

–as suppliers of new knowledge (which they cannot develop themselves),

–or organizational renewal, for experimentation with busienss models,

–for opening new markets, etc

 

New developments in innovation raises new issues and problems

•Greater emphasis on commercializing scientific discoveries, particularly in IT and the bio-sciences

•Speed and potential value of scientific progress leads to emphasis on solid and well-designed portfolios of research projects

•Universites as active drivers of innovation: Academic entrepreneurship and the entrepreneurial university

• University-industry partnerships

•Increased search for radical innovation and top-line growth.

 

Schumpeter’s distinction between ”Invention” and ”innovation”

•An ’invention’ is an idea, a sketch or model for a new or improved device, product, process or system. It has not yet entered to economic system, and most inventions never do so.

•An ’innovation’ is accomplished only with the first commercial transaction involving the new product, process, system or device. It is part of the economic system.

 

Invention and innovation

Examples - cases

•Vacuum cleaner (electric suction sweeper) was invented by J. Murray Spengler. A marketer (leather goods maker) W.H. Hoover.

•Elias Howe invented sewing machine, but Isaac Singer stole the patent.

•Samuel Morse widely credited as the father of modern telegraphy; only invented the code

•

Innovation is not easy

•In 1952 come-up with Edsel Ford to counter GM and Chrystel. In 1958 had to abandon the car at a cost of $ 450 million and 110,847 Edsels.

•In 1943 Bristol Brabazon launch aircraft embarked on building planes, but flew less than 1000 miles before the whole company was closed. The paralles with the Concorde project, developed by the same company a decade later, are hard to escape.

•In 1990s Motorolla launched an ambitious venture which aimed to offer mobile communications from anywher on the planet (via satellite). It costed US $ 7 billion putting 88 satellites (a handeset was US $3000). In 1999, they spend another US $ 55 million to bring them out of orbit and destroy them safely.

 

Models and Modes of Innovation

Dimensions of ‘innovation space’: 

•product – changes in the things (products/services) which an organization offers,

•process – changes in the ways in which they are created and delivered

•position – changes in the context in which the products/services are introduced

•paradigm – changes in the underlying mental & business models which frame what the organization does 

 

•Different aspects of Innovation

•Incremental Innovation – do what we do better’ improvement can make a huge difference. In product terms this often comes from building up on an established platform which allows a continuous stream of developments, while in process terms it allows for the pattern of continuous improvement that characterized the quality revolution and more recently lean thinking.

 

Different aspects of Innovation

•Discontinuous Innovation – (what happens when the game changes). Most of the time innovation takes place within a set of rules of the game which are clearly understood, and involves players trying to innovate by doing what they (product, process, position, etc.) but better. If something happens which dislocates this framework and changes the rules of the game. We call this discontinuous innovation.

•Example of a case:

–the Ice industry (page 29-30)

–In 1970s Xerox was dominant player in photocopies and technology (but the product was not differential)

Innovation as a process of learning & acquiring knowledge

•Competitive advantage available through innovation is around being able to harness knowledge in both tacit and explicit form.

•Innovation involves combining different kinds of knowledge (cross-functional and cross-organizational knowledge sharing). However sometimes difficulties emerge when innovation takes place at the architectural level rather than at the component level, and organizations that are very good at dealing with change in the latter can find themselves upstaged when the knowledge rules - the architecture - of their particular game are shifted.

Creating and Capturing Value

“lack of technological knowledge is rarely the cause of innovation failures…the main problems arise in organization and, more specifically, in co-ordination and control… four mechanisms identified by earlier analysts of the innovating firms: competition, cognition, co-ordination and control”

- Keith Pavitt

•Creating and Capturing Value

Managers with ‘mature perceptions’ believe that:

•the industry is stable with slow demand growth & incremental changes in technology

•profitability is achieved by process improvement and product differentiation

Managers with ‘dynamic perceptions’ believe that:

•there is potential for change, new ways of operating, & new strategies

•value is created through innovation in positions and paradigms

•Creating and Capturing Value

‘mature’ managers view:

•profitability is determined by industry, & is limited in mature industries

•market share is critical

•dominance demands extensive resources

‘dynamic’ managers view:

•

•profitability is determined by the firm. Mature industries offer many opportunities.

•Market share is reward for creating value

•effectiveness, not extent of resources counts

 

Creating and Capturing Value

Advantages of innovation in position or paradigm:

•Reputation as a pioneer

•Early learning curve benefits

•Establish barriers to entry e.g. Design, patents, standards

•Dominate new supply & distribution networks

•Earn 'monopoly' profits

•But, beware regulatory & demand uncertainty, e.g. burden of educating users

 

The Key Questions in Innovation Management

•How do we structure the innovation process appropriately?

•How do we develop effective behavioral patterns (routines), which define how it operates on a day-to-day basis?

•How do we adapt or develop parallel ones to deal with the different challenges of ‘steady state’ and discontinuous innovation?