Innovation

Innovation is defined in the dictionary as the process of making changes to something established by introducing something new. The term Innovation refers to both radical or incremental changes to products, processes or services. Innovation is often confused with the term Invent which is defined in the dictionary as creating something new, something that has never existed before.

Innovation can be positive or negative. Most ideas generated through the innovation process are destroyed and organisations that do not innovate effectively are destroyed by those that do. Positive innovation can be defined as - the process of making changes to something established by introducing something new ... that adds value to customers. Customers who experience added value are likely to return and provide sustained growth for the organisation.

The term growth is important since innovation may not only lead to increased turnover or profits but can also lead to growth in efficiency, productivity, quality, etc. All organisations can innovate including hospitals, universities, local governments, and so on.

Innovation is an important topic in the study of economics, business, sociology, and engineering. Since innovation is also considered a major driver of the economy, the factors that lead to innovation are also considered to be critical to policy makers.

Scholarly definitions

Joseph Schumpeter defined economic innovation in 1934:

1) The introduction of a new good —that is one with which consumers are not yet familiar—or of a new quality of a good. 2) The introduction of a new method of production, which need by no means be founded upon a discovery scientifically new, and can also exist in a new way of handling a commodity commercially. 3) The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before. 4) The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created. 5) The carrying out of the new organization of any industry, like the creation of a monopoly position (for example through trustification) or the breaking up of a monopoly position

The OECD defines Technological Innovation in the Oslo Manual from 1995:

Technological product and process (TPP) innovations comprise implemented technologically new products and processes and significant technological improvements in products and processes. A TPP innovation has been implemented if it has been introduced on the market (product innovation) or used within a production process (process innovation). TPP innovations involve a series of scientific, technological, organisational, financial and commercial activities. The TPP innovating firm is one that has implemented technologically new or significantly technologically improved products or processes during the period under review.

According to Regis Cabral (1998, 2003):

"Innovation is a new element introduced in the network which changes, even if momentarily, the costs of transactions between at least two actors, elements or nodes, in the network."

Amabile et al. (1996) defined innovation and its relation to creativity:

"All innovation begins with creative ideas…creativity by individuals and teams is a starting point for innovation; the first is necessary but not sufficient condition for the second". (p. 1154-1155).

As like other researchers (e.g. Stein, 1974; Woodman, Sawyer, & Griffin, 1993) Amabile et al. define creativity as the production of novel and useful ideas in any domain (p.1155). Creativity is seen as the basis for innovation and so they define innovation as the successful implementation of creative ideas within an organization (p.1155)

Types of innovation

Scholars who have studied innovation generally differentiate among five main types of innovation:

Product innovation, which involves the introduction of a new good or service that is substantially improved. This might include improvements in functional characteristics, technical abilities, ease of use, or any other dimension. It is common for companies, for instance Nintendo and others, to highlight in their public documentation and marketing the innovative aspects of their products.
Process innovation involves the implementation of a new or significantly improved production or delivery method.
Marketing innovation is the development of new marketing methods with improvement in product design or packaging, product promotion or pricing.
Organizational innovation (also referred to as social innovation) involves the creation of new organizations, business practices, ways of running organizations or new organizational behavior.
Business Model innovation involves changing the way business is done in terms of capturing value e.g. Compaq vs. Dell, hub and spoke airlines vs. Southwest, and Hertz/Avis vs. Enterprise.

In financial markets, there is frequently mentioned another type of innovation, viz. financial innovation. It is defined as development of new financial services, combining basic financial attributes (risk-sharing, liquidity, credit) in innovative ways, as well as exploiting the weaknesses of tax law.

In addition to dividing innovations into types, innovation is often characterized by its impact on existing markets or businesses. Sustaining innovations allows organizations to continue to approach markets the same way, such as the development of a faster or more fuel efficient car. Disruptive innovations on the other hand, significantly change a market or product category, such as the invention of a cheap, safe personal flying machine that could replace cars.

Similarly, incremental innovation is evolutionary innovation, a step forward along a technology trajectory, with a high chance of success and low uncertainty about outcomes. Radical innovation, on the other hand, involves larger leaps in the advancement of a technology or process.

Sources of innovation

There are two main sources of innovation. The traditionally recognized source is manufacturer innovation. This is where an agent (person or business) innovates in order to sell the innovation. The other source of innovation only now becoming widely recognized is end-user innovation. This is where an agent (person or company) develops an innovation for their own (personal or in-house) use either because existing products do not meet their needs. Eric von Hippel has identified end-user innovation as, by far, the most important and critical in his book Sources of Innovation.

Innovation by businesses is achieved in many ways, with much attention now given to formal research and development for "breakthrough innovations." But innovations may be developed by less formal on-the-job modifications of practice, through exchange and combination of professional experience and by many other routes. The more radical and revolutionary innovations tend to stem from R&D, while more incremental innovations may emerge from practice - but there are many exceptions to each of these trends.

Regarding user innovation, rarely user innovators may become entrepreneurs, selling their product, or more often they may choose to trade their innovation in exchange for other innovations. Nowadays, they may also choose to freely reveal their innovations, using methods like open source. In such networks of innovation the creativity of the users or communities of users can further develop technologies and their use.

Whether innovation is mainly supply-pushed (based on new technological possibilities) or demand-led (based on social needs and market requirements) has been a hotly debated topic. Similarly, what exactly drives innovation in organizations and economies remains an open question.

How innovation spreads

See diffusion of innovations

Goals of innovation

Each year organisations spend a significant amount of their turnover on innovation i.e. making changes to their established products, processes and services. The amount of investment can vary from as low as a half a percent of turnover for organisations with a low rate of change to anything over twenty percent of turnover for organisations with a high rate of change. This will depend on whether the organisation is a cash cow, shooting star, a dog or a question mark in terms of its position on the growth-share matrix. Cash cows are organizations that have low market growth potential and high relative market share. Shooting stars on the other hand have a high market growth potential and high relative market share. Organizations with low relative market share and low market growth rate may receive very little investment.

The average investment across all types of organizations is four percent. For an organisation with a turnover of say one billion euros, this represents an investment of forty million euros. This budget will typically be spread across various functions including marketing, product design, information systems, manufacturing systems and quality assurance.

The principle goals required in return for this investment varies between organisations. The following have been found across a large number of manufacturing and services organisations and ranked in order of popularity, with the first goal being common to most organisations and so on:

(1) Improved quality (2) Creation of new markets (3) Extension of the product range (4) Reduced labour costs (5) Improved production processes (6) Reduced materials (7) Reduce environmental damage (8) Replacement of products/services (9) Reduced energy consumption and (10) Conformance to regulations.

These goals vary between improvements to products, processes and services and dispel a popular myth that innovation deals mainly with new product development. Most of the goals could apply to any organisation be it a manufacturing facility, marketing firm, hospital or local government. None of the goals suggest any particular solution or technology e.g. computers. Technology for example may be a means to a goal, but is not the goal in itself.

Failure of innovation

There are clearly other goals for innovation within particular organisations that will vary from the list given earlier. Attaining goals must be the ultimate objective of the innovation process. Unfortunately, most innovation fails to meet organisational goals. Figures vary considerably depending on the research. Some research quotes failure rates of fifty percent while other research quotes as high as ninety percent of innovation has no impact on organisational goals. One survey regarding product innovation quotes that out of three thousand ideas for new product only one becomes a success in the marketplace. Failure is an evitable part of the innovation process and most successful organisations factor in an appropriate level of risk. Perhaps it is because all organisations experience failure that many choose not to monitor the level of failure very closely. The impact of failure goes beyond the simple loss of investment. Failure can also lead to loss of morale among employees, an increase in cynicism and even higher resistance to change in the future.

Innovations that fail are often potentially ‘good’ ideas but have been rejected or ‘shelved’ due to budgetary constraints, lack of skills or poor fit with current goals. Failures should not necessarily be eradicated but rather identified and screened out as early in the process as possible. Early screening avoids unsuitable ideas devouring scarce resources that are needed to progress more beneficial ones. Organizations can learn failure when it is openly discussed and debated. The lessons learned from failure often reside longer in the organisational conscientiousness than lessons learned from success. While learning is important high failure rates throughout the innovation process are wasteful and a threat to the organisations future.

The causes of failure have been widely researched and can vary considerably. Some causes will be external to the organisation and outside its influence of control. Others will be internal and ultimately within the control of the organisation. Internal causes of failure can be divided into causes associated with the cultural infrastructure and causes associated with the innovation process itself. Failure in the cultural infrastructure varies between organisations but the following are common across all organisations as some stages in their life cycle:

(1) Poor Leadership (2) Poor Organisation (3) Poor Communication (4) Poor Empowerment (5) Poor Knowledge Management

Common causes of failure within the innovation process in most organisations can be distilled into five types:

(1) Poor goal definition (2) Poor alignment of actions to goals (3) Poor participation in teams (4) Poor monitoring of results (5) Poor communication and access to information

Poor goals definition requires that organisations state explicitly what their goals are in terms understandable to everyone involved in the innovation process. This often involves stating goals in a number of ways. Poor alignment of actions to goals means linking explicit actions such as ideas and projects to specific goals. It also implies effective management of action portfolios. Poor participation in teams refers to the behaviour of individuals and teams. It also refers to the explicit allocation of responsibility to individuals regarding their role in goals and actions and the payment and rewards systems that link individuals to goal attainment. Finally, poor monitoring of results refers to monitoring all goals, actions and teams involved in the innovation process.

Innovation life cycle

The life cycle of innovation for a product can be described using the ‘s-curve’. The s-curve maps revenue or productivity against time. In the early stage of a particular innovation growth is relatively slow as the new product establishes itself. At some point as customers begin to demand the product growth increases exponentially. New incremental innovations or changes to the product allow growth to continue. Towards the end of its life cycle growth slows and may even begin to decline. No amount of new investment in innovation to the product will yield the same rate of return for the investment. Every product will have an s-curve i.e. a start-up phase, a rapid increase in revenue and eventual decline.

Innovative companies will typically be working on new innovations that will eventually replace older ones. The figure illustrates the s-curve for two products. The first shows the curve for a current technology. The second shows an emerging technology that will eventually overtake current technology and lead to even greater levels of growth. The length of life will depend on many factors.

File:Innovation Lifecycle

Innovation management

Innovation management is the process of managing innovations (e.g. ideas) in organisations. The first stage in innovation is for someone to generate an idea. It is typically a technical insight into a product or process or thought about a service. In some cases ideas arises from observed problems either now or in the future. Ideas can also be stimulated by the goals of the organisation or an opportunity that appears suddenly. Various stimuli can lead to the generation of an idea from reading magazines and observing problems to visiting other organisations and having informal discussions with colleagues.

Idea generation leads to opportunity recognition where someone can see an opportunity for developing the idea into a new product, process or service. The opportunity recognition stage involves idea evaluation stage where ideas are prodded and tested. Often ideas are improved, merged with other ideas and in many cases abandoned. An important test for an idea is that it matches the goals of the organisation and available resources – people and money.

If an opportunity is recognised then the idea moves to a new stage where it can be developed further. The development phase may involve prototype development and marketing testing. Many ideas wait at the end of the development phase for market conditions to be right. There are currently many new products languishing in the laboratories of Philips and Nokia waiting for their moment to begin replacing or even disrupting existing technology. The final stage of the innovation process is realisation and in many cases exploitation where the customer makes the final evaluation.

Innovation funnel

The innovation funnel provides a solution for explicitly defining the information requirements for managing the innovation process. The funnel illustrates how innovation goals, innovation actions, innovation teams and innovation results interact with each other to create change in any organisation. The innovation funnel can be visualised as containing four arrows flowing around a funnel. Each arrow represents the flow of goals, actions, teams and results. Actions enter the wide mouth of the funnel and represent among other things, alternative ideas for change. These actions flow towards to the neck of the funnel where many will be eliminated. The neck of the funnel is constrained by two arrows – goals and teams. These constraints loosen or tighten depending on the availability of teams and definition of the goals. Tightly defined goals can be visualised as closing the neck of the funnel with the change of fewer ideas flowing through. The availability of more teams on the other hand can be visualised as opening the neck of the funnel and allowing more ideas to be worked on. The final arrow, results flows from the narrow end of the funnel and represents information concerning the results of execution of goals, actions and teams. This arrow flows back towards goals representing the impact of results on the process of defining and redefining goals.

An important aspect of the innovation funnel is the associations generated between actions and both goals and teams. Ideas, for example, that cannot easily be associated with goals will find it difficult to proceed into the funnel. This has two affects; firstly the individuals or teams generating the ideas will study the goals more closely in order to generate an idea that matches better; secondly, good ideas which are not easily associated with goals will begin to impact on the definition of the goals ultimately leading to a redefinition of goals in order to allow the good ideas through. This is a natural learning process within an innovation community. When goals change there is a knock on effect in the generation of ideas that meet these goals, because the innovation community in now tuned to having new ideas meet organisational goals. The process offers the innovation community with the agility to change the innovation process in response to changing demands of stakeholders as they become known.

Measures of innovation

Individual and team level assessment can be conducted by surveys and workshops. Business measures related to financial, processes, employees and customers in balanced scorecard can be viewed from innovation perspective (e.g. new product revenue, time to market, customer and employee perception & satisfaction). Organizational capabilities can be evaluated by using applied versions of business evaluation frameworks e.g. efqm (european foundation for quality management)-model.

The OECD Oslo Manual from 1995 suggests standard guidelines on measuring technological product and process innovation.

Public awareness

Public awareness of innovation is an important part of the innovation process. This is further discussed in the emerging fields of innovation journalism and innovation communication.

References

Amabile, T.M. (1996) Creativity in context. New York: Westview Press.
Cabral, R. (1998) ‘Refining the Cabral-Dahab Science Park Management Paradigm’, Int. J. Technology Management, Vol. 16, pp. 813-818.
Cabral, R. (2003) ‘Development, Science and’ in Heilbron, J. (ed.), The Oxford Companion to The History of Modern Science, Oxford University Press, New York, pp. 205-207.
Chakravorti, B. (2003) The Slow Pace of Fast Change: Bringing Innovations to Market in a Connected World. Boston, MA: Harvard Business School Press.
Chesbrough, H.W. (2003) Open Innovation: The New Imperative for Creating and Profiting from Technology, Boston, MA: Harvard Business School Press. ISBN: 1578518377
Christensen, C. (1997) The Innovator's Dilemma. Boston, MA: Harvard Business School Press.
Hippel, von Eric The Sources of Innovation (1988) and Democratizing Innovation (2005)
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OECD The Measurement of Scientific and Technological Activities. Proposed Guidelines for Collecting and Interpreting Technological Innovation Data. Oslo Manual. 2nd edition, DSTI, OECD / European Commission Eurostat, Paris 31 Dec 1995.
Schumpeter, J. (1934) “The Theory of Economic Development”, Harvard University Press, Cambridge, Mass.
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Woodman, R.W., Sawyer, J.E., & Griffin, R.W. (1993). Toward a theory of organizational creativity. Academy of Management Review, 18: 293-321.