Topic 6: Radical Versus Routine Innovation PDF

# Topic 6: Radical Versus Routine Innovation ## Chapter Outline * Introduction * Differentiate radical innovation from routine innovation. * Schumpeter has five types of innovation. ## Introduction Innovation is becoming a must for most companies. And it is much easier today to innovate than it...

# Topic 6: Radical Versus Routine Innovation ## Chapter Outline * Introduction * Differentiate radical innovation from routine innovation. * Schumpeter has five types of innovation. ## Introduction Innovation is becoming a must for most companies. And it is much easier today to innovate than it was 50 years ago, at least in small steps. Radical innovations are difficult; many are hidden. You realize their revolutionary character only in hindsight. They are not planned. In this chapter we will differentiate radical innovation from routine innovation. Innovation can be defined as "doing things differently" in economic life. It is not synonymous with "invention". The definition of innovation is very broad and covers everything from a technological change in the production of the commodities already in use, creating new markets, gaining new supply sources, re-engineering work processes, improving materials handling or building new business organizations such as department stores. Schumpeter has five types of innovation in mind. Today we would call them innovations of: 1. Products (new commodities) 2. Processes (changes in production) 3. New markets 4. New suppliers 5. New business organizations These five fields of activity are targets of improvement in most companies: VW Golf of 2005 differed slightly from the 2004 model, it was produced with somewhat newer processes in an adapted organization, sold to new markets and had some new suppliers as well. We are so accustomed to these continuous improvements that we do not even call them innovations anymore. Only salespeople pretend that the 2005 VW Golf model is much better than its predecessor. Innovation has become a routine! Maybe VW will introduce a fully electric version of its Golf in 2020. This would be perceived as a radical innovation, because: * The product's attributes change drastically: Top acceleration, no changes of speed, no petrol... * It needs batteries, which would change the assembly lines, needs new suppliers and needs a special infrastructure to supply recharged batteries. * It will appeal to different markets, different customers. * The organization will certainly be changed as well: Perhaps batteries will be leased and not sold - a new business model is created. ## Radical Innovation Radical innovations aim to create fundamentally new businesses, products, processes and new combinations thereof. They lead to dramatic changes in the prevailing technology and are driven by new paradigms. For the company, radical innovations require a large-scale internal overhaul because they need new competencies and resources and are in many cases not only competence-destroying, but also may be even company-destroying, as in the case of Kodak. Externally, they may involve large technical advancements and make existing products non-competitive or even obsolete. Radical innovations lead to new benefits for the user unknown before. New market segments and customers need to be convinced of the new products or processes. This leads to high uncertainty and risks, as neither the application of the new technology nor its demand and economic success can be forecast. Market research does not help: Customers cannot provide information about products that do not exist. Besides fax, mobile phones, internet and e-mail, examples of radical innovations are leasing instead of investing, the container as a means of transport or the credit card as a payment innovation. ## Routine Innovation Routine innovation takes place within an already existing range of products, services, businesses or processes for already existing customers in existing market segments. The R&D department uses historical experience and applies known problem-solving methods. Typically, quality management or continuous improvement leads to routine innovation, such as performance improvement or product differentiation and adaptation to specific customer requirements. Routine innovations are mainly based on an existing innovation process that can be continuously improved in order to get new products faster with a higher quality and at lower R&D cost. Thus routine innovations are best suited for competing in existing markets and creating short-term solutions. For a company itself, routine innovation builds upon existing knowledge and resources. It is competence-enhancing. Externally, it involves modest technological enhancements to keep existing products competitive. In general, routine innovations are easier to realize than radical innovations. They are less risky and they can be planned. A marketing department neither has to promote the product aggressively nor does it have to compete for the attention of potential customers. ## Radical Innovation vs. Routine Innovation * Radical and routine innovations build on different concepts: Whereas radical innovation explores new products and processes, routine innovation exploits existing knowledge. * As project timelines for routine innovations are short, companies can incorporate market and customer feedback regularly and significantly reduce market and financial risks. * In practice most innovations are routine due to lower levels of uncertainty and easier processing. * By accumulating many routine innovations, they can have the same final impact as one radical change. * But radical innovations also have advantages, such as fast breakthroughs in technologies, products and business in the long-term. * Thus, the one big difference between radical and routine innovation is the speed of realization and surprise. ### Table 12.1: Comparison of radical and routine innovation | Key characteristics | Radical | Routine | |---|---|---| | Main change | New businesses, products, processes that change the market | Cost or feature improvements in existing products, services and processes for current markets | | Degree of novelty | High (Exploration)| Low (Exploitation)| | Impact on business | Goal: creation of a rapid growth in a new market; long-term effect | Keeps companies competitive; short-term effect | | Uncertainties, risks | High | Low | | Project timeline | Long-term, 10 years or more | Short-term, 6 months to 2 years, depending on market segment | | Trajectory | Sporadic and discontinuous | Linear and continuous | | Business case | Discovery-based learning, informal and flexible at early stages with uncertainties, after reducing uncertainties more formal | Planned problem-solving, formal, phase-gate model (concept, development, testing, marketing, manufacturing, launch) | | Process | Project starts in R&D and is transferred within the organization | Cross-functional project team within a business unit | | Organization | Resources and competencies have to be acquired, from internal and external sources | Standard resource allocation, core competencies (Budget) | | Resources and competencies | ## Drivers of Radical and Routine Innovations Radical and routine innovations differ in their consequences, but are driven by the same four major forces: 1. **Lower costs:** The original goal of automating the manufacturing process of float glass was to save costs. Reducing costs is one of the most important drivers of most innovations. It is prevalent in many routine innovations: Even mature industries like the cement industry improve their productivity by 2% every year without too much risk. Lower cost is always an advantage. 2. **Improved performance:** Containerization reduced the reloading times of ships significantly and lowered theft and transport damage. The transportation of supplies and spare parts in WW II was the original driver of this radical innovation. With the introduction of a radical new product, the intermodal container, the risk of this innovation could not directly be assessed. Neither harbors or railways nor trucking companies would have the courage to invest heavily. The risk of over-engineering always lurks behind performance improvement. 3. **New performance features:** The radical innovation of Teflon was developed by accident. With the new material PTFE, radical new performance features appeared which are very useful when dealing with aggressive chemicals or when the need for low friction arises. Teflon was first applied in the nuclear weapons industry and finally in pans, clothes and computer equipment. The application of and demand for Teflon of these new performance features could not be foreseen. Therefore risk and uncertainty in new technology is much higher than in cost reductions and performance improvements. Engineers had to find the application for Teflon this was the innovation. 4. **New competitive basis:** With smart, Nicolas G. Hayek promoted his vision of an integration of Swatch and a small car. A two-seated car for urban use was something new in a car world where all the cars get bigger and bigger. Despite the market niche, the introduction of smart was a high-risk innovation. Mercedes paid substantially: In 2008 the accumulated losses of MCC amounted to 8 billion Euros. ## Drivers of Radical and Routine Innovations For all radical innovations it is essential that somebody is surprised-users, customers, competitors or even the innovating company itself! Many radical innovations do not develop out of necessity, but out of abundance. About 65 % of the produced development resources in companies are being invested in small routine product improvements that are cost-driven or due to customer complaints and competitive pressure. They lead to engineering changes to an existing product. About 30% of the resources are being used to generate a next-generation product. Only 5% are invested in developing later generation products that could be radically different. ## In summary, there is subjective evidence: 1. Radical innovations can have the same drivers as routine innovations do, such as cost reduction and performance improvements. 2. Radical innovations can accumulate from many small routine innovations. 3. All radical innovations have one joint effect: surprise. This depends on the duration of the realization. 4. The more radical an innovation is, the more effort is needed to get acceptance, internally and externally. 5. Radical innovations are born rather in environments of abundance, less in ecologies of necessity and even less in cost reduction phases. 6. Radical innovations need all the skills of routine innovations. 7. Uncertainty grows with an increase of the radical nature of the innovation. Many companies avoid this risk.