Innovation

Chapter 3
Learning Objectives

 Explain the meaning of innovation, its purpose and how it can be measured in
a number of dimensions;
 Explain the links between creativity, invention, innovation and
entrepreneurship;
 Explain how radical innovation might be stimulated and business models
challenged so as to potentially cause a shift in market paradigms;
 Explain the relationship between innovation and risk, profitability and
growth;
 Explain how innovation is reflected in different-sized companies and in
different industry structures
THE PURPOSE OF INNOVATION

 Innovation is seen as the key to market entry, growth and survival for an
enterprise and the way entire industries change over time.
 Innovation, therefore, is at the heart of entrepreneurship.
 Entrepreneurs use it to create change and opportunity.
 They use it to create profit and sustain competitive advantage.
DEFINING AND MEASURING INNOVATION
Innovation is probably most simply defined as ‘new ways of doing something’.
Kanter (1983) defined innovation as ‘the generation, acceptance and
implementation of new ideas, processes, products and services . . . [which]
involves creative use as well as original invention’.
Schumpeter (1996) described five types of innovation, emphasizing ‘newness’:
 The introduction of a new or improved good or service.
 The introduction of a new process.
 The opening up of a new market.
 The identification of new sources of supply of raw materials.
 The creation of new types of industrial organization.
This would include organizational architecture, where the components are
configured in new ways.
Dimensions of Innovation
Innovation very simply in three dimensions, with each dimension measured on a
scale that ranges from incremental to radical:
 Product/service innovation – A completely new product or service or
improvements in its design and/or functional qualities. The internet was a
radical innovation, whereas antilock brakes for cars were an incremental
innovation. Some radical innovations, like the internet, can lead to the
development of whole new industries.
 Process innovation – Revisions to how a product or service is produced so that
it is better or cheaper (e.g. by the substitution of a cheaper material in an
existing product). The robot assembly line was a radical process innovation
whereas merging two elements of assembly would be incremental.
 Marketing innovation – Improvements in the marketing of an existing product
or service, or even a better way of distributing or supporting an existing
product or service. Selling direct to the public via telephone or the internet
was a radical marketing innovation, whereas gorilla marketing or the use of
social media was an incremental innovation.
Dimensions of Innovation

 Linking these dimensions of innovation is business model innovation.

 This is about developing distinctively different business models
 –plans for how a business competes, uses its resources, structures its
relationships, communicates with customers, creates value and
generates profit. It may involve innovations in all three dimensions:
products and processes as well as marketing.
 The development of iTunes has been called a breakthrough innovation
that revolutionized the music business by linking technology in the iPod
to a business model that monetarized recorded music at a time when
CD sales were falling and it was being pirated and downloaded for free
RADICAL PRODUCT/SERVICE INNOVATION

 Radical innovation is usually associated with a ‘mould-breaking’

development of a ‘new to-the-world’ product or process (the materials
used, the process employed or how the firm is organized to deliver them).
 Radical innovation can be disruptive – changing markets, industries, even
societies. New-to-the-world industries have been created for centuries;
water power, textiles and iron in the eighteenth century, steam, steel and
rail in the nineteenth century, and electricity, chemicals and the internal
combustion engine in the early twentieth century.
 Example: Now we have computers and mobile technologies which continue
to disrupt entire industries, for example Google’s driverless car
(threatening the car industry) and Amazon’s Fresh (threatening the fresh-
food industry). The next radical, disruptive innovations are likely to
revolve around artificial intelligence and nanotechnology.
BUSINESS MODEL INNOVATION

 business model innovation is about developing innovative plans

for how a business competes, uses its resources, structures its
relationships, communicates with customers, creates value and
generates profit.
 It may involve changes to products and processes. As with all
innovation, it can be anything from incremental to radical.
 Radical business model innovations create market paradigm
shift. They change the way people think about products or
services and create whole new markets where none existed
before.
“market paradigm shift” Changes in established market
conventions associated with the creation of radically new
markets.
CHALLENGING MARKET PARADIGMS
 Chaston (2015) argued that you can challenge the market
conventions on which established business models are
based systematically and then develop new solutions and
different models that are more attractive to customers.
 This is something that entrepreneurs do all the time as
they seek to disrupt existing, already proven markets
without incurring the often high cost and high risk of
radical product innovation.
 Finding market needs that are currently unrecognized and
unmet… ‘blue ocean strategy’.
blue ocean strategy

 The strategy of finding uncontested market space and

creating new demand – essentially market paradigm shift.
 Both involve challenging the established status quo – the
dominant logic of an industry – and asking whether
customer needs can be better met in some other way.
blue ocean strategy

 Service-dominant logic The implications for the idea that,

rather than the product, customers buy the services it
delivers. Customers valued and purchased services rather
than goods, and goods should therefore be viewed as a
medium for delivering or ‘transmitting’ the fi rm’s services.
 Consumer The person or organization consuming or using a
product. It requires a shift in focus from the product to the
consumer and a clear understanding of customer needs and
how these translate into a service they value and are
willing to pay for.
CREATIVITY AND INNOVATION
 Underpinning innovation is creativity but a prerequisite to
all creative processes is knowledge and the openness to
different ideas.
 Knowledge and the exposure to different ideas encourage
creativity, invention and radical and incremental
innovation.
 Programmes to encourage staff to be exposed to ideas
from a wide, and sometimes unusual, range of sources.
 ‘Connectivity’ is one of the key drivers of creativity – the
connection we have with a wide range of different people
and ideas.
INNOVATION AND RISK
 Many companies were risk-averse and that a risk-averse culture was a major
barrier to innovation.
 However, whilst innovation is risky, in today’s highly competitive environment
not innovating is riskier.
 Incremental product or service innovation is generally less risky than radical
innovation, not least because it builds on established knowledge and an
established product or service.
 Product or service innovation generally becomes more difficult the further an
organization strays from its core competences.
 The risks associated with product or service innovation are lowest for
organizations that are good at innovation – practice breeds competence.
 Once innovations start pushing an organization into new, unfamiliar markets,
the risks increase.
INNOVATION, PROFITABILITY AND GROWTH
 Innovation is not usually an end in itself. There are usually
other objectives. These may be related to economic,
social or environmental outcomes.
 Greater innovation intensity leading to higher profits.
 High-growth firms are more innovative than others
the linkages are not straightforward and the direct
relationship between innovation and profitability or business
growth is problematic because of both methodological and
measurement issues
INNOVATION, PROFITABILITY AND GROWTH
 How do you measure innovation? Many studies simply use R&D spend as a
proxy. However, there is no guarantee that this results in successful
innovation and without that it is just an extra expenditure that will depress
profits.
 Although innovation is positively associated with growth in employment,
any link with growth in profits is likely to be ‘lagged’, with innovation
taking time, perhaps years, to feed back into growth in profits – the more
radical the innovation, the longer the lag.
 The phenomenon of ‘cycling’ – the understandable tendency of fi rms to
innovate in one period and then ‘consolidate’ in the next– can result in
timing confusion. Improved performance might be the result of innovation
but be observed and measured in the period of consolidation.
 Finally, there is the question of causation. Even if there were an observable
link, it does not necessarily prove causation: ‘while small innovators may in
aggregate grow faster than non-innovators this is not to suggest that
innovation is a necessary, nor less a sufficient condition for growth or
superior performance’.
INNOVATION, COMPANY SIZE AND INDUSTRY STRUCTURE

 The rate of innovation (however measured) seems to vary between

firms of different size, across industries and sectors depending on
industry age and stability, and even location.
 Small and large firms have advantages in producing different types of
innovation.
 Large firms seem to outperform small firms where access to resources
and markets is important.
 Small firms play a significant role in developing and introducing radical,
disruptive innovations. They seem to innovate more efficiently than
large firms, although they tend to do this in sectors where resources
are less important.