Innovation Management

By juditovaOn 2022-10-202022-10-20

Innovation is closely linked to competitive advantage as the search for competitive advantage stimulates innovation. At this stage it is important to clarify two concepts according to Grant, 2018: (1) invention: is the creation of new products and processes through the development of new knowledge or from new combinations of existing knowledge. Most inventions are the result of novel applications of existing knowledge; (2) innovation: is the initial commercialization of an invention or an idea in the form of a new product or process.

Innovation might result from a single invention (i.e.: pharmaceutical drugs) or it might be the combination of several inventions (i.e.: the car is the combination of the wheel and the combustion engine). Besides, not all inventions come from technological developments but from the improvement of already existent technologies (i.e.: the personal computer was the improvement of already existent technology). Having said that, not all inventions become innovation because not all of them come to the market. There are always room for innovation but sometimes companies still need to find a market for them or a commercialization strategy.

Table of Contents

The Innovation Process

Innovation process. Respectfully borrowed from Grant, 2018

The figure above in Grant, 2018 shows a simple model for the innovation process. Invention builds on existing (or new) knowledge to develop a product or process. If this invention is successful, it becomes innovation which will be commercialized and diffused. On the supply side, this innovation will most likely be replicated through imitation and on the demand side, it is expected to be adopted by consumers.

Innovation does not need to create new products and can be a simple improvement of a process, product, service offered or business model. This innovation at the business level is crucial to the firm. Therefore, innovation does not need to be technology intensive and if we think about an improvement of a process (i.e.: improve the accounts opening in banking via automation). Take the example of NIO, a Chinese company of electric vehicles. The company created a new business model where it offers to the clients the substitution of their cars’ batteries forever. This will add much value to the consumer as the lifetime of batteries and their replacement is a core issue in this type of vehicles. In order to get much value as possible from innovation, managers must pay attention to employees suggestions who are capable of identifying problems and possible solutions at the business level.

Appropriability

Most of the innovations are not profitable by themselves. Profitability depends on the value that the innovation creates and the share of that value that the innovator can retain. Therefore, for an innovation to be profitable the innovator should appropriate most of that value. Appropriability is the share of the value created by the innovation that the innovator can take. For example, most of the pharfaceutical drugs have a high degree of appropriability but other businesses share most of the appropriability such as music streaming or online brokerage (i.e.: consumers appropriate a great share of the value of an ebook).

The level of appropriability depends mostly on the following factors:

Property rights: sometimes companies profit from disclosing and sharing their innovations: Sony and Toshiba shared the DVD technology hopping this would increase the technology adoption and consequently the market; companies might also desire the development of a technology and provide open access to it. Companies might also have property rights on an innovation and decide to license it to other companies to exploit the value of their property. However, if the innovation is very valuable, the company profits the most if it protects its rights to use that innovation and avoid imitation (i.e.: innovative medicines). Property rights can be assured with the following mechanisms protected by international law:
- Patents: exclusive rights to a new and useful product, process, substance, or design;
- Copyrights: exclusive production, publication, or sales rights to the creators of artistic, literary, dramatic, or musical works;
- Trademarks: Words, symbols, or other marks used to distinguish the goods or services supplied by a firm;
- Trade secrets: legal protection for knowledge acquired in the course of business (i.e.: costumer lists, recipes).
Complexity: if the company does not protect its innovation legally, the imitation depends on the complexity of the innovation and the ease of competitors to imitate it.
Lead time: if not strongly protected, the innovation will be replicated by competitors. However, the innovator always has a temporary competitive advantage on the innovation created. The company can build the capacities to become market leader before the innovation is imitated.
Complementary resources: the amount of resources and capabilities needed to produce or commercialize the innovation. If the innovation needs numerous complementary resources, it will be harder to imitate as a large investment will be needed.

Innovate or Follow

Appropriability of innovations. Respectfully borrowed from Grant, 2018

As we can see, many of the value of the innovations is appropriated by others and not by the innovator. Therefore, a fundamental question surges: should a company innovate or follow the lead? Some industries favor the leader (e.g.: chemicals and pharmaceuticals) and other favor the followers (e.g.: smartphones or social media) so the evidence is mixed. The degree to which it is worth to be an innovator depends on the following:

Property rights and time lead: if the innovation can be protected or if the innovator has a significant time lead, the chances are that the innovators will be successful and capable of becoming the market leader;
Complementary resources outside the firm: if complementary resources produced outside the firm are very important for the innovation, it will be a difficult path for the innovator. This is due to the fact that when the innovation is created, other markets of suppliers and complementary resources will need to be created. Once they are created, followers will have an easy path.
Technical standard: some markets require technical standards, such as technological solutions (i.e.: we need a computer that fulfills certain basic functions). In this case, the advantage is to the leader that will be able to set the standards of that market.

Nevertheless, bold ideas and taking risks was the key to worldwide development. Therefore, innovation should always be promoted and leaders should understand how to sustain the value of their innovation. Windows of opportunity should be taken and leverage on first-mover advantage.

However, emerging markets are very risky and companies must be aware of that fact. The risks come mainly from technological and market uncertainties. The first, concerns the uncertainty of how the technology will evolve once launched (i.e.: it was unpredictable how mobile phones would evolve to smartphones). The second, concerns the uncertainty of how the market will react and grow to the innovation (i.e.: will consumers adopt the innovation?).

In order to tackle these uncertainties, campaniles could cooperate with early users as they will likely be interested in the innovation and willing to suggest improvements. Companies could also limit risk exposure to that innovation (i.e.: not incur in debt and diversify) and be flexible to react to sudden and unpredictable changes.

Companies must also be aware of network externalities which happen when the value of a product/service depends on the number of users, in other words, a product will be more valuable if it has many users. This can be due to products where users are linked to a network such as phones (i.e.: I do not need a phone if nobody has one). Externalities can also arise from complementary products/services as complements will only appear in products/services with enough users in order to be profitable. Lastly, due to switching costs because if a large number of consumers use a product/service it is likely to be the leader and the consumer will not have costs of replacing it for a new one in the near future.

Sources of Innovation

Innovation needs organizational conditions to thrive and needs important resources such as capital, people and time. As follows, we will explore the sources of innovation:

Creativity: innovations usually come from creativity. Creative people tend to be able to connect concepts otherwise disconnected but their creativity depends much on the environment in which they are. The organization must promote creativity via human interaction, experimentation and do not punish failed attempts to innovate.
Costumers: most innovations derive from practical needs. A careful examination of costumers’ needs will be a source of inspiration to create innovative solutions which bring value to them. Companies might also create the needs for some product/service in the consumers’ minds. If it is adopted, it will be a source of competitive advantage.
Open innovation: this approach applies knowledge both from inside and outside the firm. This will involve clients but possibly other companies or complements. An example are free software such as Linux or R-Studio which base their development is contributions from users.
Buying innovation: innovation is not easy to obtain so for many companies, particularly large ones, a solution is to buy innovation from competitors. For example, large technological firms buy small technological start-up firms to obtain their innovative solutions.

Innovation and Business Strategy

Innovation modes. Respectfully borrowed from Grant, 2018

The quest for innovation must be aligned with the overall strategy of the company, particularly at the business strategy level. The company must understand how the innovation creates value for the clients and how could the firm get value from those innovations too. Gary Pisano developed the model above which helps to clarify different innovation modes that the companies could adopt. The model builds on two dimensions: (1) business model adaptation and (2) technical capabilities.

Disruptive innovation: requires a new business model using existent technical capabilities;
Routine innovation: uses the current business model and technical capabilities;
Architectural innovation: requires a new business model and new technical capabilities;
Radical innovation: uses the current business model but requires new technical capabilities.

Examples

Evolution of cell phones

Over the past 35 years, the cell phones evolved drastically until achieving the smartphone status we know today. This is a business characterized by innovation and constant change with many competitors operating in the same market. Some of the innovations did not succeed and others simply were overcome by best solutions.

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