Managing Innovation: Integrating Technological, Market, and Organizational Change PDF

MANAGING INNOVATION Integrating Technological, Market and Organizational Change Third Edition Joe Tidd Science and Technology Policy Research (SPRU), University of Sussex John Bessant School of Management, Cranﬁeld University Keith Pavitt Reviews for the third edition ‘A limpid and very useful account of what we know about the management of inno- vation. Must read for executives, scholars and students.’ Yves Doz, Timken Chaired Professor of Global Technology and Innovation, INSEAD. Reviews for the second edition ‘This is an extraordinary synthesis of the most important things that are understood about innovation, written by some of the world’s foremost scholars in this ﬁeld.’ Clayton M. Christensen, Professor of Business Administration, Harvard Business School. ‘The capacity to innovate is a key source of competitive advantage; but the manage- ment of innovation is risky. The authors provide a clear, systematic and integrated framework which will guide students and practising managers alike through a complex ﬁeld. Updated to address key contemporary themes in knowledge management, networks and new technology, and with an exemplary combination of research and practitioner material, this is probably the most comprehensive guide to innovation management currently available.’ Rob Goffee, Professor of Organizational Behaviour, London Business School. ‘In a highly readable yet challenging text, Tidd, Bessant and Pavitt are true to their sub- title, since they do indeed achieve a rare analytical integration of technological, market and organizational change. Alive to the vital importance of context, they nonetheless reveal generic aspects to the process of innovation. Read this book and you will under- stand more, and with a little luck, an encounter with a rich example will resonate with experience, hopes and fears and provide a useful guide to action.’ Sandra Dawson, KPMG Professor of Management Studies and Director, Judge Institute of Management, University of Cambridge. ‘This is an excellent book. Not only is it practical and easy to read, it is also full of useful cases and examples, as well as a comprehensive reference to the current litera- ture. I will be recommending it to my entrepreneurship students.’ Professor Sue Birley, Director, The Entrepreneurship Centre, Imperial College, University of London, UK. ‘The ﬁrst edition of this book was essential reading for anyone trying to get to grips with innovation in theory and practice. This new edition, by embracing the challengees faced in the “new economy”, is an ideal companion for the serious innovator. Starting from the view that anyone can develop competencies in innovation this comprehen- sive text provides managers with essential support as they develop their capability. The second edition contains many case illustrations illuminating both theory and practice in successful innovation and is a “must” for aspiring MBAs.’ David Birchall, Professor and Director of the Centre for Business in the Digital Economy (CBDE), Henley Management College, UK. ‘The authors of this book have managed to capture the essence of leading-edge think- ing in the management of techonological innovation and presented the multi- dimensional nature of the subject in an integrated manner that will be useful for the practitioner and essential reading for students and researchers in the ﬁeld. This is the book we have been waiting for!’ Professor Carl W. I. Pistorius, Dean, Management of Technology Programme, University of Pretoria, South Africa. ‘Innovation has become widely recognized as a key to competitive success. Leaders of businesses of all sizes and from all industries now put sustained innovation among their top priorities and concerns – but, for many, innovation seems mysterious, unpredictable, apparently unmanageable. Yet it can be managed. This book provides a highly readable account of the best current thinking about building and sustaining innovation. It draws particular attention to important emerging issues, such as the use of networks of sup- pliers, customers and others outside the ﬁrm itself to stimulate innovation, and the role of knowledge and knowledge management to support and sustain it. As the authors say, there is no “one best way” to manage innovation: different situations call for different solutions. But if you want to drive innovation in your own organization, this book will help you to understand the issues that matter and the steps you can take.’ Richard J. Granger, Vice President, Technology & Innovation Management Practice, Arthur D. Little Inc. ‘Innovation has always been a challenge, but never more so nowadays in these turbu- lent times. This second edition of Managing Innovation helps address the practicalities of the challenge and places them ﬁrmly in today’s new environment, where technology is changing faster and faster. Integrating the multiple aspects of innovation – and not just treating it as a technical issue – is a real beneﬁt this book brings.’ C. John Brady, Director, McKinsey & Company Inc. ‘The characteristics of doing business today – rapid change, extreme volatility and high uncertainty – mean that traditional ways of managing technology need to be radically reappraised for any company that sees technical leadership as a critical business differentiator. Through their research work and worldwide network, Joe Tidd, John Bessant and Keith Pavitt have brought together the latest thinking on innovation management, extensively illustrated with real world examples, and with pointers to how successful implementations may emerge in the future. This book is well worth reading for all who want to achieve leadership in technology management.’ David Hughes, Executive Vice President, Technology Management, Marconi plc. ‘Innovation is the cornerstone of what makes businesses successful: offering something uniquely better to the consumer. Innovation, while key, is probably the most difﬁcult (maybe even impossible) element of corporate activity to manage or plan. This book does an excellent job of setting out the speciﬁcation of ways we can think about how to create innovative organizations, without prescribing a “recipe for success”.’ Dr Neil MacGilp, Director, Corporate R&D, Procter & Gamble. MANAGING INNOVATION MANAGING INNOVATION Integrating Technological, Market and Organizational Change Third Edition Joe Tidd Science and Technology Policy Research (SPRU), University of Sussex John Bessant School of Management, Cranﬁeld University Keith Pavitt Third edition © 2005 Joe Tidd, John Bessant and Keith Pavitt First edition © 1997 John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England Telephone (+44) 1243 779777 Email (for orders and customer service enquiries): [email protected] Visit our Home Page on www.wileyeurope.com or www.wiley.com All Rights Reserved. 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If professional advice or other expert assistance is required, the serv- ices of a competent professional should be sought. Other Wiley Editorial Ofﬁces John Wiley & Sons Inc., 111 River Street, Hoboken, NJ 07030, USA Jossey-Bass, 989 Market Street, San Francisco, CA 94103-1741, USA Wiley-VCH Verlag GmbH, Boschstr. 12, D-69469 Weinheim, Germany John Wiley & Sons Australia Ltd, 33 Park Road, Milton, Queensland 4064, Australia John Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop #02-01, Jin Xing Distripark, Singapore 129809 John Wiley & Sons Canada Ltd, 22 Worcester Road, Etobicoke, Ontario, Canada M9W 1L1 Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data Tidd, Joseph, 1960– Managing innovation : integrating technological, market and organizational change / Joe Tidd, John Bessant, Keith Pavitt.– 3rd ed. p. cm. Includes bibliographical references and index. ISBN 0-470-09326-9 (pbk. : alk. paper) 1. Technological innovations–Management. 2. Industrial management. 3. Organizational change. I. Bessant, J. R. II. Pavitt, Keith. III. Title. HD45.T534 2005 658.5¢14–dc22 2004026221 British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 0-470-09326-9 (PB) Typeset in SNP Best-set Typesetter Ltd., Hong Kong Printed and bound in Great Britain by Scotprint, Haddington, East Lothian This book is printed on acid-free paper responsibly manufactured from sustainable forestry in which at least two trees are planted for each one used for paper production. This third edition of Managing Innovation is dedicated to our co-author, friend and colleague, Keith Pavitt, who died in December 2002. Keith was an inspiration to us, and many others. Keith’s research combined empirical evidence and common sense to generate realistic and robust theoretical and practical insights. His work was based on a deep empirical understanding of innovation and ﬁrm behaviour, and contributed to the development of new data, methods and taxonomies. His contributions spanned economics, management and science and technology policy, and included insights into the structure, dynamics and management of innovation processes, the relationship between basic research and technical change, knowledge and the theory of the ﬁrm, the globalization of R&D, and science and technology policy. Joe Tidd John Bessant Contents Preface xiii About the authors xvii Part I MANAGING FOR INNOVATION 1 1 Key Issues in Innovation Management 3 1.1 Innovation and Competitive Advantage 5 1.2 Types of Innovation 10 1.3 The Importance of Incremental Innovation 13 1.4 Innovation as a Knowledge-based Process 15 1.5 The Challenge of Discontinuous Innovation 18 1.6 Christensen’s Disruptive Innovation Theory 29 1.7 Other Sources of Discontinuity 32 1.8 Innovation Is Not Easy... 37 1.9... But It Is Imperative 39 1.10 New Challenges, Same Old Responses? 42 1.11 Outline of the Book 55 1.12 Summary and Further Reading 58 References 59 2 Innovation as a Management Process 65 2.1 Innovation as a Core Business Process 67 2.2 Evolving Models of the Process 75 2.3 Consequences of Partial Understanding of the Innovation Process 78 2.4 Can We Manage Innovation? 78 2.5 Successful Innovation and Successful Innovators 85 2.6 What Do We Know About Successful Innovation Management? 85 2.7 Roadmaps for Success 88 2.8 Key Contextual Inﬂuences 97 2.9 Beyond the Steady State 98 x M A N A G I N G I N N O VAT I O N 2.10 Beyond Boundaries 100 2.11 Summary and Further Reading 100 References 101 Part II TAKING A STRATEGIC APPROACH 107 3 Developing the Framework for an Innovation Strategy 111 3.1 ‘Rationalist’ or ‘Incrementalist’ Strategies for Innovation? 111 3.2 Technology and Competitive Analysis 118 3.3 Assessment of Porter’s Framework 121 3.4 The Dynamic Capabilities of Firms 125 3.5 Innovation Strategy in Small Firms 126 3.6 Summary and Further Reading 127 References 129 4 Positions: The National and Competitive Environment 131 4.1 National Systems of Innovation 131 4.2 Coping with Competitors 146 4.3 Appropriating the Beneﬁts from Innovation 152 4.4 Positioning of Small Firms 161 4.5 Summary and Further Reading 163 References 165 5 Paths: Exploiting Technological Trajectories 169 5.1 Major Technological Trajectories 170 5.2 Revolutionary Technologies: Biotechnology, Materials and IT 174 5.3 Developing Firm-speciﬁc Competencies 181 5.4 Technological Paths in Small Firms 196 5.5 Summary and Further Reading 199 References 202 6 Processes: Integration for Strategic Learning 205 6.1 Locating R&D Activities – Corporate versus Divisional 206 6.2 Locating R&D Activities – Global versus Local 211 6.3 Allocating Resources for Innovation 216 6.4 Technology and Corporate Strategy 223 6.5 Organizational Processes in Small Firms 231 6.6 Summary and Further Reading 232 References 234 CONTENTS xi Part III ESTABLISHING EFFECTIVE EXTERNAL LINKAGES 237 7 Learning from Markets 239 7.1 How Do Technology and Markets Affect Commercialization? 239 7.2 Differentiating Products 244 7.3 Creating Architectural Products 249 7.4 Marketing Technological Products 257 7.5 Commercializing Complex Products 263 7.6 Forecasting the Diffusion of Innovations 270 7.7 Summary and Further Reading 280 References 282 8 Learning Through Alliances 285 8.1 Why Collaborate? 285 8.2 Forms of Collaboration 291 8.3 Patterns of Collaboration 315 8.4 Effect of Technology and Organization 319 8.5 Managing Alliances for Learning 329 8.6 Summary and Further Reading 340 References 341 Part IV BUILDING EFFECTIVE IMPLEMENTATION MECHANISMS 345 9 Managing the Internal Processes 347 9.1 Enabling Effective Search 349 9.2 Enabling Strategy-making 362 9.3 Enabling Effective Knowledge Acquisition 372 9.4 Enabling Implementation 378 9.5 Launch 393 9.6 Enabling Learning and Re-innovation... 400 9.7 Beyond the Steady State – Making It Happen under Discontinuous Conditions 405 9.8 Beyond the Boundaries 411 9.9 Summary and Further Reading 414 References 416 10 Learning Through Corporate Ventures 425 10.1 What is a Corporate Venture? 425 10.2 Reasons for Corporate Venturing 430 10.3 Managing Corporate Ventures 437 xii M A N A G I N G I N N O VAT I O N 10.4 Structures for Corporate Ventures 447 10.5 Learning Through Internal Ventures 456 10.6 Summary and Further Reading 461 References 462 Part V CREATING THE INNOVATIVE ORGANIZATION 465 11 Building the Innovative Organization 467 11.1 Shared Vision, Leadership and the Will to Innovate 468 11.2 Appropriate Organization Structure 473 11.3 Key Individuals 476 11.4 Stretching Training and Development 484 11.5 High Involvement in Innovation 485 11.6 Effective Team Working 494 11.7 Creative Climate 498 11.8 External Focus 500 11.9 Extensive Communication 501 11.10 The Learning Organization 502 11.11 Beyond the Boundaries 504 11.12 Beyond the Steady State 506 11.13 Summary and Further Reading 513 References 513 12 Creating Innovative New Firms 523 12.1 Sources of New Technology-based Firms 523 12.2 University Incubators 525 12.3 Proﬁle of a Technical Entrepreneur 531 12.4 The Business Plan 535 12.5 Growth and Performance of Innovative Small Firms 548 12.6 Summary and Further Reading 553 References 554 Part VI ASSESSING AND IMPROVING INNOVATION MANAGEMENT PERFORMANCE 557 13 An Integrative Approach to Innovation Management 559 13.1 Key Themes 559 13.2 Learning to Manage Innovation 561 13.3 Auditing Innovation Management 564 13.4 What Kind of Innovator is Your Organization? 569 References 574 Index 577 Preface Recent surveys conﬁrm that whilst most managers acknowledge the importance of innovation, the majority are dissatisﬁed with the management of innovation in their organizations.1 In fact the performance of innovation varies signiﬁcantly between dif- ferent sectors, and between ﬁrms in the same sector, suggesting that both structural and organizational factors inﬂuence the effect of innovation on performance.2 Manage- ment research conﬁrms that innovative ﬁrms – those that are able to use innovation to improve their processes or to differentiate their products and services – outperform their competitors, measured in terms of market share, proﬁtability, growth or market capitalization.3 However, the management of innovation is inherently difﬁcult and risky: most new technologies fail to be translated into products and services, and most new products and services are not commercial successes. In short, innovation can enhance competitiveness, but it requires a different set of management knowledge and skills from those of everyday business administration. This book aims to equip readers with the knowledge to understand, and the skills to manage, innovation at the operational and strategic levels. Speciﬁcally, the book aims to integrate the management of market, technological and organizational change to improve the competitiveness of ﬁrms and effectiveness of other organizations. The man- agement of innovation is inherently interdisciplinary and multifunctional, but most management texts tend to emphasize a single dimension, such as the management of research and development, production and operations management, marketing man- agement, product development or organizational development. In contrast we aim here to provide an integrative approach to the management of innovation. Since the ﬁrst edition was published in 1997 innovation has become a major driver of success in an increasing number of activities and sectors, and is no longer conﬁned to large manufacturing ﬁrms. Services now account for around three-quarters of value and employment in the advanced economies, and innovation is increasingly central to the performance of these services in the private and public sectors.4 The impact of the information and communication technologies (ICTs) in logistics, distribution and ser- vices has already been signiﬁcant, and has resulted in a wave of new ventures, which began (rather than ended) with the Internet Bubble of the late 1990s. The completion of the initial stages of mapping the human genome promises to have a similar impact xiv M A N A G I N G I N N O VAT I O N on the pharmaceutical and healthcare sectors in the near future. In both cases there is good reason to believe that the competitive and economic exploitation of these and other emerging technologies has just begun. At the same time, more innovative solu- tions to the challenges of sustainability are increasingly needed.5 In parallel, research on the management of innovation has increased in depth and breadth, improving our understanding and challenging our previous assumptions. Therefore in this third edition we have taken the opportunity to update or replace about a ﬁfth of the ma- terial, to incorporate seven years of feedback from readers and users of the ﬁrst and second editions, and to improve our coverage of contemporary topics such as disrup- tive innovation, service innovation, innovation networks, innovation and sustainabil- ity, entrepreneurship, and intellectual property. We have also invested in the website that supports this text to increase its scale and scope, and to more fully support the needs of users (http://www.managing-innovation.com). The latest management research and the experience of leading practitioners conﬁrm that signiﬁcant dimensions in the management of innovation are not satisfactorily addressed by management teaching or texts. For example, the management of techno- logical innovation reaches beyond efforts to improve the efﬁciency of production or research and development, to include the effectiveness of technological development, that is the translation of technology into successful products and services. This sug- gests a competence- and knowledge-based approach to technology management, which also requires analysis of organizational structures and processes. The management of organizational innovation has shifted from an emphasis on ‘change management’ of structure and culture, to the design and improvement of internal processes, such as knowledge management, and external linkages and networks. In market innovation there has been a shift in emphasis from crude market segmentation and analysis of con- sumer behaviour, to relationship and networked marketing that demands ﬁne target- ing of product development and closer linkages with lead customers. All this suggests that it is not sufﬁcient to focus on a single dimension of innova- tion: technological, market and organizational change interact. Better management of research and development may improve the efﬁciency or productivity of technological innovation, but is unlikely to contribute to product effectiveness, and therefore cannot guarantee commercial or ﬁnancial success. Even the most expensive and sophisticated market research will fail to identify the potential for radically new products and ser- vices. Flat organizational structures and streamlined business processes may improve efﬁciency of delivering today’s products and services, but will not identify or deliver innovative products and services, and may become redundant due to technological or market change.6 In this book we aim to provide a coherent framework to integrate the management of technological, market and organizational change. We reject the ‘one best way’ school C OP NR TE EF NA CT SE xv of management, and instead seek to identify the links between the structures and processes which support innovation, and the opportunity for, and constraints on, innovation in speciﬁc technological and market environments. We shall argue that the process of innovation management is essentially generic, although organization-, technological- and market-speciﬁc factors will constrain choices and actions. We present a number of processes that contribute to the successful management of innovation, which are based on internal knowledge and competencies, but at the same time fully exploit external sources of know-how. Contingencies such as ﬁrm size, tech- nological complexity and environmental uncertainty will inﬂuence the precise choice of processes; for example, complexity requires increased participation in networks of suppliers and users, whereas uncertainty demands vigilance in scanning the external technological and market environment. This book is written with the needs of postgraduate and other management students in mind, speciﬁcally those studying MBA electives or options on the management of innovation and technology, or M.Sc. courses dedicated to technology and operations management. It is also relevant to managers charged with the management of research and development, product development or organizational change. Where possible, we provide examples of good, and not so good practice, drawn from a range of sectors and countries. However, the book is designed to encourage and support organization- speciﬁc experimentation and learning, and not to substitute for it.7 Our analysis and prescriptions are based on the systematic analysis of the latest management research and practice, and our own research, consulting and teaching experiences at SPRU – Science and Technology Policy Research, at the University of Sussex, UK, and the School of Management at Cranﬁeld University, as well as our experience in the USA, Europe and Asia. In 2002 SPRU joined CENTRIM (Centre for Research in Innovation Management) in the £12 million purpose-built Freeman Centre at Sussex University, to create one of the greatest concentrations of researchers in the ﬁeld of technology and innovation and management and policy. For details of our current teaching and research please visit us at www.sussex.ac.uk/spru and www.cranﬁeld.ac.uk. We would appreci- ate your feedback. Joe Tidd John Bessant Brighton, Sussex, UK, October 2004 xvi M A N A G I N G I N N O VAT I O N References 1 Arthur D. Little (2004) Innovation Excellence Study. ADL, Boston, Mass. 2 EIRMA (2004) Assessing R&D Effectiveness. EIRMA working group paper no. 62. Paris. 3 Tidd, J. (2000) From Knowledge Management to Strategic Competence: Measuring technological, market and organzational innovation. Imperial College Press, London. 4 Tidd, J. and F.M. Hull (2003) Service Innovation: Organizational responses to technological oppor- tunities and market imperatives. Imperial College Press, London. 5 Berkhout, F. and K. Green (eds) (2002) Special Issue on ‘Managing Innovation for Sustain- ability’, International Journal of Innovation Management, 6 (3). 6 Bessant, J. (2003) High Involvement Innovation. John Wiley & Sons, Ltd, Chichester. 7 Isaksen, S. and J. Tidd (2006) Meeting the Innovation Challenge: Leadership for transformation and growth. John Wiley & Sons, Ltd, Chichester. A B O U T T H E CAOUNTTHE ON RT S xvii About the authors Joe Tidd is a physicist with subsequent degrees in technology policy and business administration. He is Professor of Technol- ogy and Innovation Management and Director of Studies at SPRU (Science & Technology Policy Research), University of Sussex, UK, and Visiting Professor at University College London, Copenhagen Business School and the Rotterdam School of Man- agement. He was previously Head of the Management of Joe Tidd Innovation Specialization and Director of the Executive MBA Programme at Imperial College, University of London. He has worked as policy adviser to the CBI (Confederation of British Industry), responsible for industrial innovation and advanced technologies, where he developed and launched the annual CBI Innovation Trends Survey, and presented expert evidence to three Select Committee Enquiries held by the House of Commons and House of Lords. He was a researcher for the ﬁve-year, $5 million International Motor Vehicle Program organized by the Massachusetts Institute of Technology (MIT) in the USA, and has worked on research and consultancy projects on technology and innovation man- agement for consultants Arthur D. Little, CAP Gemini and McKinsey, and numerous technology-based ﬁrms, including American Express Technology, Applied Materials, ASML, BOC Edwards, BT, Marconi, National Power, NKT, Nortel Networks and Petro- bras. He is the winner of the Price Waterhouse Urwick Medal for contribution to man- agement teaching and research, and the Epton Prize from the R&D Society. He has written ﬁve books and more than 70 papers on the management of technology and innovation, the most recent being Service Innovation: Organizational responses to techno- logical opportunities and market imperatives (with Frank Hull), Imperial College Press, 2003, and is Managing Editor of the International Journal of Innovation Management. Contact: [email protected] John Bessant is Professor of Innovation Management at the School of Management, Cranﬁeld University. He also holds a Fellowship of the Advanced Institute for Management Research which he was awarded in 2003. He graduated from Aston Uni- versity with a degree in Chemical Engineering in 1975 and later obtained a Ph.D. for work on innovation within the chemical industry. After a spell in industry he took up full-time research and consultancy in the ﬁeld of technology and innovation John Bessant management working at Aston’s Technology Policy Unit, the Science Policy Research Unit at Sussex University and at xviii M A N A G I N G I N N O VAT I O N Brighton University where he held the Chair in Technology Management from 1987 to 2002. Prior to joining the faculty at Cranﬁeld, John was Director of Brighton University’s Centre for Research in Innovation Management which he set up in 1987. He oversaw its development into a research institute with a staff of 30 people working on around 50 projects for public and private sponsors in the ﬁeld of effective innovation management. He is an Honorary Professor at SPRU, Sussex University and a Visiting Fellow at several UK and international universities. He served on the Business and Management panel of the 2001 Research Assessment Exercise. In 2003 he was elected a Fellow of the British Academy of Management. His areas of research interest include the management of discontinuous innovation, strategies for developing high involvement innovation and enabling effective inter-ﬁrm collaboration and learning in product and process innovation. He is the author of 20 books and many articles on the topic and has lectured and consulted widely around the world. He has acted as advisor to various national governments and to international bodies including the United Nations, The World Bank and the OECD. Contact: john.bessant@cranﬁeld.ac.uk Part I MANAGING FOR I N N O VAT I O N Chapter 1 Key Issues in Innovation Management ‘A slow sort of country’ said the Red Queen. ‘Now here, you see, it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!’ (Lewis Carroll, Alice through the Looking Glass) ‘We always eat elephants...’ is a surprising claim made by Carlos Broens, founder and head of a successful toolmaking and precision engineering ﬁrm in Australia with an enviable growth record. Broens Industries is a small/medium-sized company of 130 employees which survives in a highly competitive world by exporting over 70% of its products and services to technologically demanding ﬁrms in aerospace, medical and other advanced markets. The quote doesn’t refer to strange dietary habits but to their conﬁdence in ‘taking on the challenges normally seen as impossible for ﬁrms of our size’ – a capability which is grounded in a culture of innovation in products and the processes which go to produce them.1 At the other end of the scale spectrum Kumba Resources is a large South African mining company which makes another dramatic claim – ‘We move mountains’. In their case the mountains contain iron ore and their huge operations require large-scale exca- vation – and restitution of the landscape afterwards. Much of their business involves complex large-scale machinery – and their abilities to keep it running and productive depend on a workforce able to contribute their innovative ideas on a continuing basis.2 Innovation is driven by the ability to see connections, to spot opportunities and to take advantage of them. When the Tasman Bridge collapsed in Hobart, Tasmania, in 1975 Robert Clifford was running a small ferry company and saw an opportunity to capitalize on the increased demand for ferries – and to differentiate his by selling drinks to thirsty cross-city commuters. The same entrepreneurial ﬂair later helped him build a company – Incat – which pioneered the wave-piercing design which helped them capture over half the world market for fast catamaran ferries. Continuing investment in innovation has helped this company from a relatively isolated island build a key niche in highly competitive international military and civilian markets (www.incat.com.au/). But innovation is not just about opening up new markets – it can also offer new ways of serving established and mature ones. Despite a global shift in textile and cloth- ing manufacture towards developing countries the Spanish company, Inditex (through 4 M A N A G I N G I N N O VAT I O N its retail outlets under various names including Zara) have pioneered a highly ﬂexible, fast turnaround clothing operation with over 2000 outlets in 52 countries. It was founded by Amancio Ortega Gaona who set up a small operation in the west of Spain in La Coruna – a region not previously noted for textile production – and the ﬁrst store opened there in 1975. Central to the Inditex philosophy is close linkage between design, manufacture and retailing and their network of stores constantly feeds back information about trends which are used to generate new designs. They also experi- ment with new ideas directly on the public, trying samples of cloth or design and quickly getting back indications of what is going to catch on. Despite their global ori- entation, most manufacturing is still done in Spain, and they have managed to reduce the turnaround time between a trigger signal for an innovation and responding to it to around 15 days (www.inditex.com/en). Of course, technology often plays a key role in enabling radical new options. Magink is a company set up in 2000 by a group of Israeli engineers and now part of the giant Mitsubishi concern. Its business is in exploiting the emerging ﬁeld of digital ink tech- nology – essentially enabling paper-like display technology for indoor and outdoor displays. These have a number of advantages over other displays such as liquid crystal – low-cost, high viewing angles and high visibility even in full sunlight. One of their major new lines of development is in advertising billboards – a market worth $5 bn in the USA alone – where the prospect of ‘programmable hoardings’ is now opened up. Magink enables high resolution images which can be changed much more frequently than conventional paper advertising, and permit billboard site owners to offer variable price time slots, much as television does at present.3 At the other end of the technological scale there is scope for improvement on an old product – the humble eyeglass. A chance meeting took place between an Oxford physics professor developing his own new ophthalmic lens technology (and with an interest in applying it in the developing world) and someone with a great deal of knowledge of the developing world. This has led to a new technology with the potential to transform the lives of hundreds of millions of people in the developing world – a pair of spec- tacles with lenses that can be adjusted by the wearer to suit their visual needs. No sight tests by opticians are required, the special lenses can be simply adjusted to accurately correct the vision of large numbers of people. Mass production of the spectacles will soon be under way, with manufacturing designed to give high quality at low cost. In the developing world, where a severe shortage of opticians is a real problem, this inno- vation is likely to have an impact on a larger number of people than the celebrated wind-up radio. Innovation is of course not conﬁned to manufactured products; examples of turn- around through innovation can be found in services and in the public and private sector.4 For example, the Karolinska Hospital in Stockholm has managed to make K E Y I S S U E S I N I N N O VAT I O N M A N A G E M E N T 5 radical improvements in the speed, quality and effectiveness of its care services – such as cutting waiting lists by 75% and cancellations by 80% – through innovation.5 In banking the UK First Direct organization became the most competitive bank, attract- ing around 10 000 new customers each month by offering a telephone banking service backed up by sophisticated IT. A similar approach to the insurance business – Direct Line – radically changed the basis of that market and led to widespread imitation by all the major players in the sector.6,7 Internet-based retailers such as Amazon.com have changed the ways in which products as diverse as books, music and travel are sold, whilst ﬁrms like e-Bay have brought the auction house into many living rooms. 1.1 Innovation and Competitive Advantage What these organizations have in common is that their undoubted success derives in large measure from innovation. Whilst competitive advantage can come from size, or possession of assets, etc. the pattern is increasingly coming to favour those organiza- tions which can mobilize knowledge and technological skills and experience to create novelty in their offerings (product/service) and the ways in which they create and deliver those offerings.8 This is seen not only at the level of the individual enterprise but increasingly as the wellspring for national economic growth. For example, the UK Ofﬁce of Science and Technology see it as ‘the motor of the modern economy, turning ideas and knowledge into products and services’.9 Innovation contributes in several ways. For example, research evidence suggests a strong correlation between market performance and new products.10,11 New products help capture and retain market shares, and increase proﬁtability in those markets. In the case of more mature and established products, competitive sales growth comes not simply from being able to offer low prices but also from a variety of non-price factors – design, customization and quality.6 And in a world of shortening product life cycles – where, for example, the life of a particular model of television set or computer is measured in months, and even complex products like motor cars now take only a couple of years to develop – being able to replace products frequently with better ver- sions is increasingly important.12,13 ‘Competing in time’ reﬂects a growing pressure on ﬁrms not just to introduce new products but to do so faster than competitors.12,14 At the same time new product development is an important capability because the environment is constantly changing. Shifts in the socio-economic ﬁeld (in what people believe, expect, want and earn) create opportunities and constraints. Legislation may open up new pathways, or close down others – for example, increasing the require- ments for environmentally friendly products. Competitors may introduce new 6 M A N A G I N G I N N O VAT I O N products which represent a major threat to existing market positions. In all these ways ﬁrms need the capability to respond through product innovation. Whilst new products are often seen as the cutting edge of innovation in the mar- ketplace, process innovation plays just as important a strategic role. Being able to make something no one else can, or to do so in ways which are better than anyone else is a powerful source of advantage. For example, the Japanese dominance in the late twen- tieth century across several sectors – cars, motorcycles, shipbuilding, consumer elec- tronics – owed a great deal to superior abilities in manufacturing – something which resulted from a consistent pattern of process innovation. The Toyota production system and its equivalent in Honda and Nissan led to performance advantages of around two to one over average car makers across a range of quality and productivity indicators.15 One of the main reasons for the ability of relatively small ﬁrms like Oxford Instruments or Incat to survive in highly competitive global markets is the sheer complexity of what they make and the huge difﬁculties a new entrant would encounter in trying to learn and master their technologies. Similarly, being able to offer better service – faster, cheaper, higher quality – has long been seen as a source of competitive edge. Citibank was the ﬁrst bank to offer auto- mated telling machinery (ATM) service and developed a strong market position as a technology leader on the back of this process innovation. Benetton is one of the world’s most successful retailers, largely due to its, sophisticated IT-led production network, which it innovated over a 10-year period,16 and the same model has been used to great effect by the Spanish ﬁrm Zara. Southwest Airlines achieved an enviable position as the most effective airline in the USA despite being much smaller than its rivals; its success was due to process innovation in areas like reducing airport turnaround times.17 This model has subsequently become the template for a whole new generation of low-cost airlines whose efforts have revolutionized the once-cosy world of air travel. Importantly we need to remember that the advantages which ﬂow from these inno- vative steps gradually get competed away as others imitate. Unless an organization is able to move into further innovation, it risks being left behind as others take the lead in changing their offerings, their operational processes or the underlying models which drive their business. For example, leadership in banking has passed to others, particularly those who were able to capitalize early on the boom in information and communications technologies; in particular many of the lucrative ﬁnancial services like securities and share dealing have been dominated by players with radical new models like Charles Schwab.18 As retailers all adopt advanced IT so the lead shifts to those who are able – like Zara and Benneton – to streamline their production operations to respond rapidly to the signals ﬂagged by the IT systems. With the rise of the Internet the scope for service innovation has grown enormously – not for nothing is it sometimes called ‘a solution looking for problems’. As Evans and K E Y I S S U E S I N I N N O VAT I O N M A N A G E M E N T 7 Wurster point out, the traditional picture of services being either offered as a standard to a large market (high ‘reach’ in their terms) or else highly specialized and customized to a particular individual able to pay a high price (high ‘richness’) is ‘blown to bits’ by the opportunities of Web-based technology. Now it becomes possible to offer both rich- ness and reach at the same time – and thus to create totally new markets and disrupt radically those which exist in any information-related businesses.19 The challenge which the Internet poses is not only one for the major banks and retail companies, although those are the stories which hit the headlines. It is also an issue – and quite possibly a survival one – for thousands of small businesses. Think about the local travel agent and the cosy way in which it used to operate. Racks full of glossy brochures through which people could browse, desks at which helpful sales assistants sort out the details of selecting and booking a holiday, procuring the tickets, arranging insurance and so on. And then think about how all of this can be accomplished BOX 1.1 JOSEPH SCHUMPETER – THE ‘GODFATHER’ OF INNOVATION STUDIES The ‘godfather’ of this area of economic theory was Joseph Schumpeter who wrote extensively on the subject. He had a distinguished career as an economist and served as Minister for Finance in the Austrian Government. His argument was simple: entrepreneurs will seek to use technological innovation – a new product/service or a new process for making it – to get strategic advantage. For a while this may be the only example of the innovation so the entrepreneur can expect to make a lot of money – what Schumpeter calls ‘monopoly proﬁts’. But of course other entrepreneurs will see what he has done and try to imitate it – with the result that other innovations emerge, and the resulting ‘swarm’ of new ideas chips away at the monopoly proﬁts until an equilibrium is reached. At this point the cycle repeats itself – our original entrepreneur or someone else looks for the next innovation which will rewrite the rules of the game, and off we go again. Schumpeter talks of a process of ‘creative destruction’ where there is a constant search to create something new which simultaneously destroys the old rules and establishes new ones – all driven by the search for new sources of proﬁts.20 In his view: [What counts is] competition from the new commodity, the new technology, the new source of supply, the new type of organization... competition which... strikes not at the margins of the proﬁts and the outputs of the existing ﬁrms but at their foun- dations and their very lives. 8 M A N A G I N G I N N O VAT I O N TABLE 1.1 Strategic advantages through innovation Mechanism Strategic advantage Examples Novelty in Offering something no one Introducing the ﬁrst... Walkman, product or else can fountain pen, camera, dishwasher, service telephone bank, on-line retailer, etc. offering... to the world Novelty in Offering it in ways others Pilkington’s ﬂoat glass process, Bessemer’s process cannot match – faster, steel process, Internet banking, on-line lower cost, more bookselling, etc. customized, etc. Complexity Offering something which Rolls-Royce and aircraft engines – only a others ﬁnd it difﬁcult to handful of competitors can master the master complex machining and metallurgy involved Legal protection Offering something which Blockbuster drugs like Zantac, Prozac, of intellectual others cannot do unless Viagra, etc. property they pay a licence or other fee Add/extend Move basis of competition – Japanese car manufacturing, which range of e.g. from price of systematically moved the competitive competitive product to price and agenda from price to quality, to factors quality, or price, quality, ﬂexibility and choice, to shorter times choice, etc. between launch of new models, and so on – each time not trading these off against each other but offering them all Timing First-mover advantage – Amazon.com, Yahoo – others can follow, being ﬁrst can be worth but the advantage ‘sticks’ to the early signiﬁcant market share movers in new product ﬁelds Fast follower advantage – Palm Pilot and other personal digital sometimes being ﬁrst assistants (PDAs) which have captured means you encounter a huge and growing share of the many unexpected market. In fact the concept and teething problems, and design was articulated in Apple’s ill- it makes better sense to fated Newton product some ﬁve years watch someone else earlier – but problems with software make the early mistakes and especially handwriting recognition and move fast into a meant it ﬂopped follow-up product K E Y I S S U E S I N I N N O VAT I O N M A N A G E M E N T 9 Mechanism Strategic advantage Examples Robust/ Offering something which Walkman architecture – through platform provides the platform on minidisk, CD, DVD, MP3... Boeing design which other variations 737 – over 30 years old, the design is and generations can be still being adapted and conﬁgured to built suit different users – one of the most successful aircraft in the world in terms of sales. Intel and AMD with different variants of their microprocessor families Rewriting the Offering something which Typewriters vs. computer word rules represents a completely processing, ice vs. refrigerators, new product or process electric vs. gas or oil lamps concept – a different way of doing things – and makes the old ones redundant Reconﬁguring Rethinking the way in Zara, Benetton in clothing, Dell in the parts of which bits of the system computers, Toyota in its supply chain the process work together – e.g. management building more effective networks, outsourcing and co-ordination of a virtual company, etc. Transferring Recombining established Polycarbonate wheels transferred from across elements for different application market like rolling luggage different markets into children’s toys – lightweight application micro-scooters contexts Others? Innovation is all about Napster. This ﬁrm began by writing ﬁnding new ways to do software which would enable music things and to obtain fans to swap their favourite pieces via strategic advantage – so the Internet – the Napster program there will be room for essentially connected person to person new ways of gaining and (P2P) by providing a fast link. Its retaining advantage potential to change the architecture and mode of operation of the Internet was much greater, and although Napster suffered from legal issues followers developed a huge industry based on downloading and ﬁle sharing (see Box 1.3 for more detail on this) 10 M A N A G I N G I N N O VAT I O N at the click of a mouse from the comfort of home – and that it can potentially be done with more choice and at lower cost. Not surprisingly, one of the biggest growth areas in dot.com start-ups was the travel sector and whilst many disappeared when the bubble burst, others like lastminute.com and Expedia have established themselves as mainstream players. Of course, not everyone wants to shop online and there will continue to be scope for the high-street travel agent in some form – specializing in personal service, acting as a gateway to the Internet-based services for those who are uncomfortable with com- puters, etc. And, as we have seen, the early euphoria around the dot.com bubble has given rise to a much more cautious advance in Internet-based business. The point is that whatever the dominant technological, social or market conditions, the key to cre- ating – and sustaining – competitive advantage is likely to lie with those organizations which continually innovate. Table 1.1 indicates some of the ways in which enterprises can obtain strategic advan- tage through innovation. 1.2 Types of Innovation Before we go too much further it will be worth deﬁning our terms. What do we mean by ‘innovation’? Essentially we are talking about change, and this can take several forms; for the purposes of this book we will focus on four broad categories (the ‘4Ps’ of innovation):21 ‘product innovation’ – changes in the things (products/services) which an organiza- tion offers; ‘process innovation’ – changes in the ways in which they are created and delivered; ‘position innovation’ – changes in the context in which the products/services are introduced; ‘paradigm innovation’ – changes in the underlying mental models which frame what the organization does. For example, a new design of car, a new insurance package for accident-prone babies and a new home entertainment system would all be examples of product innovation. And change in the manufacturing methods and equipment used to produce the car or the home entertainment system, or in the ofﬁce procedures and sequencing in the insurance case, would be examples of process innovation. Sometimes the dividing line is somewhat blurred – for example, a new jet-powered sea ferry is both a product and a process innovation. Services represent a particular K E Y I S S U E S I N I N N O VAT I O N M A N A G E M E N T 11 case of this where the product and process aspects often merge – for example, is a new holiday package a product or process change? Innovation can also take place by repositioning the perception of an established product or process in a particular user context. For example, an old-established product in the UK is Lucozade – originally developed as a glucose-based drink to help children and invalids in convalescence. These associations with sickness were abandoned by the brand owners, SmithKline Beecham, when they relaunched the product as a health drink aimed at the growing ﬁtness market where it is now presented as a performance- enhancing aid to healthy exercise. This shift is a good example of ‘position’ innovation. Sometimes opportunities for innovation emerge when we reframe the way we look at something. Henry Ford fundamentally changed the face of transportation not because he invented the motor car (he was a comparative latecomer to the new industry) nor because he developed the manufacturing process to put one together (as a craft-based specialist industry car-making had been established for around 20 years). His contri- bution was to change the underlying model from one which offered a handmade specialist product to a few wealthy customers to one which offered a car for Everyman at a price they could afford. The ensuing shift from craft to mass production was nothing short of a revolution in the way cars (and later countless other products and services) were created and delivered.15 Of course making the new approach work in practice also required extensive product and process innovation – for example, in component design, in machinery building, in factory layout and particularly in the social system around which work was organized. Recent examples of ‘paradigm’ innovation – changes in mental models – include the shift to low-cost airlines, the provision of online insurance and other ﬁnancial services, and the repositioning of drinks like coffee and fruit juice as premium ‘designer’ prod- ucts. Although in its later days Enron became infamous for ﬁnancial malpractice it originally came to prominence as a small gas pipeline contractor which realized the potential in paradigm innovation in the utilities business. In a climate of deregulation and with global interconnection through grid distribution systems energy and other utilities like telecommunications bandwidth increasingly became commodities which could be traded much as sugar or cocoa futures.22 From Incremental to Radical Innovation A second dimension to change is the degree of novelty involved. Clearly, updating the styling on our car is not the same as coming up with a completely new concept car which has an electric engine and is made of new composite materials as opposed to steel and glass. Similarly, increasing the speed and accuracy of a lathe is not the same thing as replacing it with a computer-controlled laser forming process. There are degrees 12 M A N A G I N G I N N O VAT I O N SYSTEM LEVEL New generations New versions e.g. MP3 and Steam power, of motor car, download vs. ICT ‘revolution’, aeroplane, TV CD and bio-technology cassette music Advanced New components materials to Improvements for existing improve to components systems component COMPONENT performance LEVEL INCREMENTAL RADICAL (‘doing what (‘new to the (‘new to we do better’) enterprise’) the world’) FIGURE 1.1 Dimensions of innovation of novelty in these, running from minor, incremental improvements right through to radical changes which transform the way we think about and use them. Sometimes these changes are common to a particular sector or activity, but sometimes they are so radical and far-reaching that they change the basis of society – for example the role played by steam power in the Industrial Revolution or the ubiquitous changes result- ing from today’s communications and computing technologies. Figure 1.1 illustrates this continuum, highlighting the point that such change can happen at component or sub-system level or across the whole system. Mapping Innovation Space Each of our 4Ps of innovation can take place along an axis running from incremental through to radical change; the area indicated by the circle in Figure 1.2 is the poten- tial innovation space within which an organization can operate. Whether it actually explores and exploits all the space is a question for innovation strategy and we will return to it later. As far as managing the innovation process is concerned, these differences are impor- tant. The ways in which we approach incremental, day-to-day change will differ from those used occasionally to handle a radical step change in product or process. But we K E Y I S S U E S I N I N N O VAT I O N M A N A G E M E N T 13 ‘ PA R A D I G M ’ ( M E N TA L M O D E L ) (incremental... radical) PROCESS PRODUCT INNOVATION (SERVICE) (incremental... radical) (incremental... radical) (incremental... radical) POSITION FIGURE 1.2 Innovation space should also remember that it is the perceived degree of novelty which matters; novelty is very much in the eye of the beholder. For example, in a giant, technologically advanced organization like Shell or IBM advanced networked information systems are commonplace, but for a small car dealership or food processor even the use of a simple PC to connect to the Internet may still represent a major challenge.23 1.3 The Importance of Incremental Innovation Although innovation sometimes involves a discontinuous shift – something completely new or a response to dramatically changed conditions – most of the time it takes place in incremental fashion. Products are rarely ‘new to the world’, process innovation is mainly about optimization and getting the bugs out of the system. (Ettlie suggests dis- ruptive or new to the world innovations are only 6% to 10% of all projects labelled innovation.)24 Studies of incremental process development (such as Hollander’s famous 14 M A N A G I N G I N N O VAT I O N study of Du Pont rayon plants) suggest that the cumulative gains in efﬁciency are often much greater over time than those which come from occasional radical changes.25 Other examples include Tremblay’s studies of paper mills, Enos on petroleum reﬁning and Figueredo’s of steel plants.26–28 Continuous improvement of this kind has received considerable attention in recent years, ﬁrst as part of the ‘total quality management’ movement, reﬂecting the signiﬁ- cant gains which Japanese manufacturers were able to make in improving quality and productivity through sustained incremental change.29 But this is not new – similar prin- ciples underpin the famous ‘learning curve’ effect where productivity improves with increases in the scale of production; the reason for this lies in the learning and con- tinuous incremental problem-solving innovation which accompanies the introduction of a new product or process.30 More recent experience of deploying ‘lean’ thinking in manufacturing and services and increasingly between as well as within enterprises underlines further the huge scope for such continuous innovation.15 One way in which the continuous innovation approach can be harnessed to good effect is through the concept of platform or robust design. This is a way of creating stretch and space within the envelope and depends on being able to establish a strong basic platform or family which can be extended. Rothwell and Gardiner give several examples of such ‘robust designs’ which can be stretched and otherwise modiﬁed to extend the range and life of the product, including Boeing airliners and Rolls-Royce jet engines.31 Major investments by large semiconductor manufacturers like Intel and AMD are amortized to some extent by being used to design and produce a family of devices based on common families or platforms such as the Pentium, Celeron, Athlon or Duron chipsets. Car makers are increasingly moving to produce models which although appar- ently different in style make use of common components and ﬂoor pans or chassis. Perhaps the most famous product platform is the ‘Walkman’ originally developed by Sony as a portable radio and cassette system; the platform concept has come to under- pin a wide range of offerings from all major manufacturers for this market and deploy- ing technologies like minidisk, CD, DVD and now MP3 players. In processes much has been made of the ability to enhance and improve perform- ance over many years from the original design concepts – in ﬁelds like steel-making and chemicals, for example. Service innovation offers other examples where a basic concept can be adapted and tailored for a wide range of similar applications without undergoing the high initial design costs – as is the case with different mortgage or insur- ance products. Platforms and families are powerful ways for companies to recoup their high initial investments in R&D by deploying the technology across a number of market ﬁelds. For example, Procter & Gamble invested heavily in their cyclodextrin development for original application in detergents but then were able to use this technology or variants K E Y I S S U E S I N I N N O VAT I O N M A N A G E M E N T 15 on it in a family of products including odour control (‘Febreze’), soaps and ﬁne fra- grances (‘Olay’), off-ﬂavour food control, disinfectants, bleaches and fabric softening (‘Tide’, ‘Bounce’, etc.). They were also able to license out the technology for use in non- competing areas like industrial scale carpet care and in the pharmaceutical industry. 1.4 Innovation as a Knowledge-based Process Innovation is about knowledge – creating new possibilities through combining differ- ent knowledge sets. These can be in the form of knowledge about what is technically possible or what particular conﬁguration of this would meet an articulated or latent need. Such knowledge may already exist in our experience, based on something we have seen or done before. Or it could result from a process of search – research into technologies, markets, competitor actions, etc. And it could be in explicit form, codi- ﬁed in such a way that others can access it, discuss it, transfer it, etc. – or it can be in tacit form, known about but not actually put into words or formulae.32 The process of weaving these different knowledge sets together into a successful innovation is one which takes place under highly uncertain conditions. We don’t know about what the ﬁnal innovation conﬁguration will look like (and we don’t know how we will get there). Managing innovation is about turning these uncertainties into knowl- edge – but we can do so only by committing resources to reduce the uncertainty – effectively a balancing act. Figure 1.3 illustrates this process of increasing resource com- mitment whilst reducing uncertainty. Viewed in this way we can see that incremental innovation, whilst by no means risk-free – is at least potentially manageable because we are starting from something we know about and developing improvements in it. But as we move to more radical options, so uncertainty is higher and at the limit we have no prior idea of what we are to develop or how to develop it! Again this helps us understand why discontinuous innovation is so hard to deal with. A key contribution to our understanding here comes from the work of Henderson and Clark who looked closely at the kinds of knowledge involved in different kinds of innovation.33 They argue that innovation rarely involves dealing with a single technol- ogy or market but rather a bundle of knowledge which is brought together into a con- ﬁguration. Successful innovation management requires that we can get hold of and use knowledge about components but also about how those can be put together – what they termed the architecture of an innovation. We can see this more clearly with an example. Change at the component level in building a ﬂying machine might involve switching to newer metallurgy or composite 16 M A N A G I N G I N N O VAT I O N H i g h Uncertainty Commitment INCREAS ING R ESOU RCE COMMI T MENT technological, and ‘lock-in’ market, etc. Low TIME FIGURE 1.3 Innovation, uncertainty and resource commitment materials for the wing construction or the use of ﬂy-by-wire controls instead of control lines or hydraulics. But the underlying knowledge about how to link aerofoil shapes, control systems, propulsion systems, etc. at the system level is unchanged – and being successful at both requires a different and higher order set of competencies. One of the difﬁculties with this is that innovation knowledge ﬂows – and the struc- tures which evolve to support them – tend to reﬂect the nature of the innovation. So if it is at component level then the relevant people with skills and knowledge around these components will talk to each other – and when change takes place they can inte- grate new knowledge. But when change takes place at the higher system level – ‘archi- tectural innovation’ in Henderson and Clark’s terms – then the existing channels and ﬂows may not be appropriate or sufﬁcient to support the innovation and the ﬁrm needs to develop new ones. This is another reason why existing incumbents often fare badly when major system level change takes place – because they have the twin difﬁculties of learning and conﬁguring a new knowledge system and ‘unlearning’ an old and estab- lished one. A variation on this theme comes in the ﬁeld of ‘technology fusion’, where different technological streams converge, such that products which used to have a discrete identity begin to merge into new architectures. An example here is the home automa- tion industry, where the fusion of technologies like computing, telecommunications, K E Y I S S U E S I N I N N O VAT I O N M A N A G E M E N T 17 industrial control and elementary robotics is enabling a new generation of housing systems with integrated entertainment, environmental control (heating, air condition- ing, lighting, etc.) and communication possibilities.34,35 Similarly, in services a new addition to the range of ﬁnancial services may represent a component product innovation, but its impacts are likely to be less far-reaching (and the attendant risks of its introduction lower) than a complete shift in the nature of the service package – for example, the shift to direct-line systems instead of offering ﬁnan- cial services through intermediaries. Figure 1.4 highlights the issues for managing innovation. In Zone 1 the rules of the game are clear – this is about steady-state improvement to products or processes and uses knowledge accumulated around core components. In Zone 2 there is signiﬁcant change in one element but the overall architecture remains the same. Here there is a need to learn new knowledge but within an estab- lished and clear framework of sources and users – for example, moving to electronic ignition or direct injection in a car engine, the use of new materials in airframe com- ponents, the use of IT systems instead of paper processing in key ﬁnancial or insur- ance transactions, etc. None of these involve major shifts or dislocations. In Zone 3 we have discontinuous innovation where neither the end state nor the ways in which it can be achieved are known about – essentially the whole set of rules of the game changes and there is scope for new entrants. ZONE 2 ZONE 3 Overturned – modular – discontinuous innovation innovation CORE IN N O VAT I O N CONCEPTS ZONE 1 ZONE 4 Reinforced – incremental – architectural innovation innovation Unchanged Changed L IN KS BE T WEEN K NOWLEDGE ELEMEN TS FIGURE 1.4 Component and architectural innovation 18 M A N A G I N G I N N O VAT I O N In Zone 4 we have the condition where new combinations – architectures – emerge, possibly around the needs of different groups of users (as in the disruptive innovation case). Here the challenge is in reconﬁguring the knowledge sources and conﬁgurations. We may use existing knowledge and recombine it in different ways or we may use a combination of new and old. Examples might be low-cost airlines, direct line insur- ance, others. 1.5 The Challenge of Discontinuous Innovation 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 have been doing (product, process, position, etc.) but better. Some manage this more effec- tively than others but the ‘rules of the game’ are accepted and do not change.21 But occasionally something happens which dislocates this framework and changes the rules of the game. By deﬁnition these are not everyday events but they have the capacity to redeﬁne the space and the boundary conditions – they open up new oppor- tunities but also challenge existing players to reframe what they are doing in the light of new conditions.18,19,22 This is a central theme in Schumpeter’s original theory of inno- vation which he saw as involving a process of ‘creative destruction’.20,36,37 What seems to happen is that for a given set of technological and market conditions there is a long period of relative stability during which a continuous stream of vari- ations around a basic innovation theme take place. Essentially this is product/process improvement along the lines of ‘doing what we do, but better’. For example, the Bic ballpoint pen was originally developed in 1957 but remains a strong product with daily sales of 14 million units worldwide. Although superﬁcially the same shape, closer inspection reveals a host of incremental changes that have taken place in materials, inks, ball technology, safety features, etc. But these ‘steady-state’ innovation conditions are punctuated by occasional discon- tinuities – and when these occur one or more of the basic conditions (technology, markets, social, regulatory, etc.) shifts dramatically. In the process the underlying ‘rules of the game’ change and a new opportunity space for innovation opens up. ‘Do different’ conditions of this kind occur, for example, when radical change takes place along the technological frontier or when completely new markets emerge. An emerg- ing example of this could be the replacement of the incandescent light bulb originally developed in the late nineteenth century by Edison and Swan (amongst others). This K E Y I S S U E S I N I N N O VAT I O N M A N A G E M E N T 19 may be replaced by the solid state white light emitting diode technology patented by Nichia Chemical. This technology is 85% more energy efﬁcient, has 16 times the life of a conventional bulb, is brighter, is more ﬂexible in application and is likely to be subject to the scale economies associated with electronic component production. See Box 1.2 for a more detailed discussion of this. In their pioneering work on this theme Abernathy and Utterback developed a model describing the pattern in terms of three distinct phases. Initially, under discontinuous conditions, there is what they term a ‘ﬂuid phase’ during which there is high uncer- tainty along two dimensions: The target – what will the new conﬁguration be and who will want it? The technical – how will we harness new technological knowledge to create and deliver this? No one knows what the ‘right’ conﬁguration of technological means and market needs will be and so there is extensive experimentation (accompanied by many failures) and fast learning by a range of players including many new entrepreneurial businesses. Gradually these experiments begin to converge around what they call a ‘dominant design’ – something which begins to set up the rules of the game. This represents a convergence around the most popular (importantly not necessarily the most techno- logically sophisticated or elegant) solution to the emerging conﬁguration. At this point a ‘bandwagon’ begins to roll and innovation options become increasingly channeled around a core set of possibilities – what Dosi calls a ‘technological trajectory’.38 It becomes increasingly difﬁcult to explore outside this space because entrepreneurial interest and the resources which that brings increasingly focus on possibilities within the dominant design corridor. This can apply to products or processes; in both cases the key characteristics become stabilized and experimentation moves to getting the bugs out and reﬁning the dominant design. For example, the nineteenth-century chemical industry moved from making soda ash (an essential ingredient in making soap, glass and a host of other prod- ucts) from the earliest days where it was produced by burning vegetable matter through to a sophisticated chemical reaction which was carried out on a batch process (the Leblanc process) which was one of the drivers of the Industrial Revolution. This process dominated for nearly a century but was in turn replaced by a new generation of con- tinuous processes which used electrolytic techniques and which originated in Belgium where they were developed by the Solvay brothers. Moving to the Leblanc process or the Solvay process did not happen overnight; it took decades of work to reﬁne and improve each process, and to fully understand the chemistry and engineering required to get consistent high quality and output. 20 M A N A G I N G I N N O VAT I O N BOX 1.2 LIVING WITH DISCONTINUOUS CHANGE When discontinuous conditions emerge they challenge the ‘rules of the game’ – and both pose threats to the existing players and offer opportunities for those quick enough to take advantage of the new ones. A good example can be seen in the world of publishing. On the one hand we have an industry which was, until recently, based on very physical technologies and a complex network of specialist suppliers who contributed their particular parts of the complex puzzle of pub- lishing. For example, copy – words or pictures – would be generated by a specialist journalist or photographer. They would then pass this on to various editors who would check, make choices about design and layout, etc. Next would come typesetting where the physical materials for printing would be made – hot metal would be cast into letters and grouped into blocks to form words and sen- tences within special frames. Pictures and other items would be transferred onto printing plates. The type frames or printing plates would then be ﬁxed to presses, these would be inked and some test runs made. And ﬁnally the printed version would appear – and passed on to someone else to distribute and publish it. Such a method might still be recognizable by Messrs Caxton and Gutenberg – the pioneers of the printing industry. But it is likely that they would not have much idea about the way in which publishing operates today – with its emphasis on IT. Now the process has changed such that a single person could undertake the whole set of operations – create text on a word processor, design and lay it out on a page- formatting program, integrate images with text and when satisﬁed print to either physical media or – increasingly – publish it worldwide in electronic form. There are plenty of examples of ﬁrms which have exploited this or related opportunities. For example, Adplates is – or was until recently – a small ﬁrm in north London specializing in the production of printing plates for the advertising industry (hence the name). They used to be a small link in a long chain which began with a client and an advertising agency agreeing about an advertisement. The photo shoot and copy lines would be created and eventually the material would arrive at Adplates who would carry out the task of preparing a printing plate – which they would then pass on to a printer to use. In other words they were a small link in a long chain. But technology has changed all that for them. They began to challenge the boundaries of the operation in which they were part – why, for example, could they not move upstream to deal directly with the client? Of course this required K E Y I S S U E S I N I N N O VAT I O N M A N A G E M E N T 21 new skills and technology in areas like design and image and text preparation – but all of this is available on a PC. Equally, since printing has moved from hot metal to a largely digital process, they could invest in the skills and equipment to move downstream. And why should they leave it to a publisher to disseminate the material when the market and the technology in this end of the industry is chang- ing so rapidly and opening up so many opportunities? Adplates now offers a com- plete service to clients from initial idea through to printing and even has its own stable of magazines and a thriving Web publishing operation. There are winners in this game but also losers. People still think of the Ency- clopaedia Britannica as a household name and the repository of useful reference knowledge which can be trusted. It is a well-established product – in fact the origi- nal idea came from three Scottish printers back in 1768! The brand is ﬁne – but the business has gone through dramatic shifts and is still under threat. From a peak of sales in 1990 of around $650m. its sales have collapsed – for example, in the USA by up to 80%. The problem is not the product but the way in which it is presented – all the hard copy encyclopedias have suffered a similar fate at the hands of the CD-ROM-based versions like Encarta (which is often bundled in as part of a PC purchase). We could go on looking at the publishing industry but the point is clear – when technology shifts dramatically it opens up major opportunities but also poses major threats to players in the industry and to those who might want to enter from outside. Under these conditions simply being an established player – even with a centuries-old brand name and an excellent product – is not enough. Indeed – as ﬁrms like Amazon.com have shown – it is at times like these that coming from outside and starting fresh may offer signiﬁcant advantages. What is going on here is clearly not conforming to a stable, big-is-beautiful model, nor is it about historically important emphasis on core competence. The foundations of a business like publishing become shaken and many of the famous names disappear whilst other unknown upstarts become major industry players – in some cases overnight! (Amazon.com was at one time worth more than double the market value of established businesses like British Airways.) Turbulence like this throws a challenge to established models of managing – not only is it a ques- tion of urgently needing to change but the very models of change management on which many traditional players rely may not be sufﬁcient or appropriate. 22 M A N A G I N G I N N O VAT I O N The same pattern can be seen in products. For example, the original design for a camera is something which goes back to the early nineteenth century and – as a visit to any science museum will show – involved all sorts of ingenious solutions. The dominant design gradually emerged with an architecture which we would recognize – shutter and lens arrangement, focusing principles, back plate for ﬁlm or plates, etc. But this design was then modiﬁed still further – for example, with different lenses, motor- ized drives, ﬂash technology – and, in the case of George Eastman’s work, to creating a simple and relatively ‘idiot-proof’ model camera (the Box Brownie) which opened up photography to a mass market. More recent development has seen a similar ﬂuid phase around digital imaging devices. The period in which the dominant design emerges and emphasis shifts to imitation and development around it is termed the ‘transitional phase’ in the Abernathy and Utterback model. Activities move from radical concept development to more focused efforts geared around product differentiation and to delivering it reliably, cheaply, with higher quality, extended functionality, etc. As the concept matures still further so incremental innovation becomes more signiﬁcant and emphasis shifts to factors like cost – which means efforts within the industries which grow up around these product areas tend to focus increasingly on rationalization, on scale economies and on process innovation to drive out cost and improve productivity. Product innovation is increasingly about differentiation through customization to meet the particular needs of speciﬁc users. Abernathy and Utterback term this the ‘speciﬁc phase’.* Finally the stage is set for change – the scope for innovation becomes smaller and smaller whilst outside – for example, in the laboratories and imaginations of research scientists – new possibilities are emerging. Eventually a new technology emerges which has the potential to challenge all the by now well-established rules – and the game is disrupted. In the camera case, for example, this is happening with the advent of digital photography which is having an impact on cameras and the overall service package around how we get, keep and share our photographs. In our chemical case this is hap- pening with biotechnology and the emergence of the possibility of no longer needing giant chemical plants but instead moving to small-scale operations using live organ- isms genetically engineered to produce what we need. Table 1.2 sets out the main elements of this model. Although originally developed for manufactured products the model also works for services – for example the early days of Internet banking were characterized by a typically ﬂuid phase with many options and models being offered. This gradually moved to a transitional phase, build- * A good example of this can be seen in the case of bicycles which went through an extended period of ﬂu- idity in design options before the dominant diamond frame emerged which has characterized the industry for the past century.11 K E Y I S S U E S I N I N N O VAT I O N M A N A G E M E N T 23 TABLE 1.2 Stages in innovation life cycle Innovation Fluid pattern Transitional phase Speciﬁc phase characteristic Competitive Functional product Product variation Cost reduction emphasis performance placed on... Innovation Information on user Opportunities created Pressure to reduce stimulated needs, technical by expanding cost, improve by... inputs internal technical quality, etc. capability Predominant Frequent major Major process Incremental product type of changes in innovations required and process innovation products by rising volume innovation Product line Diverse, often Includes at least one Mostly including custom stable or dominant undifferentiated designs design standard products Production Flexible and Becoming more rigid Efﬁcient, often capital processes inefﬁcient – aim and deﬁned intensive and is to experiment relatively rigid and make frequent changes ing a dominant design consensus on the package of services offered, the levels and nature of security and privacy support, the interactivity of website, etc. The ﬁeld has now become mature with much of the competition shifting to marginal issues like rel- ative interest rates. The pattern can be seen in many studies and its implications for innovation management are important. In particular it helps us understand why established organizations often ﬁnd it hard to deal with discontinuous change. Organizations build capabilities around a particular trajectory and those who may be strong in the later (speciﬁc) phase of an established trajectory often ﬁnd it hard to move into the new one. (The example of the ﬁrms which successfully exploited the transistor in the early 1950s is a good case in point – many were new ventures, sometimes started by enthusiasts in their garage, yet they rose to challenge major players in the electronics industry like Raytheon.39) This is partly a consequence of sunk costs and commitments to existing technologies and markets and partly because of psychological and institutional bar- riers.40 They may respond but in slow fashion – and they may make the mistake of giving responsibility for the new development to those whose current activities would be threatened by a shift.41 Importantly, the ‘ﬂuid’ or ‘ferment’ phase is characterized by co-existence of old and new technologies and by rapid improvements of both.41,42 (It is here that the so-called 24 M A N A G I N G I N N O VAT I O N ‘sailing ship’ effect can often be observed, in which a mature technology accelerates in its rate of improvement as a response to a competing new alternative – as was the case with the development of sailing ships in competition with newly emerging steamship technology.43,44 Whilst some research suggests existing incumbents do badly, we need to be careful here. Not all existing players do badly – many of them are able to build on the new trajectory and deploy/leverage their accumulated knowledge, networks, skills and ﬁnancial assets to enhance their competence through building on the new opportu- nity.42† Equally whilst it is true that new entrants – often small entrepreneurial ﬁrms – play a strong role in this early phase we should not forget that we see only the suc- cessful players. We need to remember that there is a strong ecological pressure on new entrants which means only the ﬁttest or luckiest survive. It is more helpful to suggest that there is something about the ways in which inno- vation is managed under these conditions which poses problems. Good practice of the ‘steady-state’ ki

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