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The Role of Innovation in Economics
The Role of Innovation in Economics
by David Dubois

David Dubois for The 2004 Moffatt Prize in Economics

Innovation in the 21st Century

 

 

 

“The legs are the wheels of creativity.”

~ Albert Einstein ~

 

 

I don’t know if you have pointed it out, but there are more and more articles and books in the Management area that deal with the concept of innovation, putting it at the front of the economic stage. In 1990, just for the European Union, some 670 new books whose main subject was innovation were published. In 1995, this number increased to 1130. The last figures in this area are showing that this number has reached 1540 publications of books for the present year. No one will then contests that this notion is at the centre of many current managers’ concerns.

 

Innovation, like spring, is in the air. Creativity is all the rage, Entrepreneurship is on every agenda. As Einstein tells us, it seems managers are more and more “using their legs” (and their brains) to convert their ideas into constructive products. Indeed, a lot of serious surveys show that more and more product or service innovations arrive on the market. According to a survey made by the WTO in 2003, for 100 new products or services developed in 2000, there were 123 in 2002, and 164 in 2003. How come this quite new and tremendous interest for what should be a daily preoccupation of managers?

I will try to demonstrate that one of the major reasons is that, with the acceleration of globalization process, innovation is more and more seen as the appropriate tool to create business value. Hence the three parts of this article which aims at giving a general overview of the topic. First, we will describe the general framework of both free trade market and current economic trends, then we will analyse more deeply the core concept of innovation. Finally, implementation of innovation will be treated, before widening our thought regarding key concepts such as value, and knowledge management.  Indeed creativity and innovation concern the process of creating and applying new knowledge. As such, they are at the very heart of the emerging knowledge management.

 

By focusing on the interaction between innovation and business, this paper argues that contrary to the popular perception, innovations do not succeed quite by chance, coincidence or accident. On the contrary, figures point out that innovations have to be thought, managers need a real strategy, and the products and services have to be marketed and diffused in coherence with the overall strategy.

 

I finally precise this article’s aim is not to be exhaustive, but just to give some tracks about what could be one of the bedrocks of the 21st century’s management.

 

 

I. Knowledge, general trends, and market in the 21st free trade economy.

 

  1. Some definitions

 

To have a meaningful conversation about innovation, knowledge and creativity, it is essential to carefully define the words we use. People often use the same words with subtly different meanings. Many English words in every day use are utilised loosely and ambiguously. If we do not think about their usage we greatly hinder communication. Defining our words helps set a framework in which we can better discuss the concepts which with we are dealing. It also helps better differentiate the concepts and relate them to each other in a more meaningful way.

 

Let's first differentiate between data, information, knowledge and wisdom as the distinctions are often blurred or confused. Although knowledge is often seen as a richer form of information, this differentiation is not terribly helpful. A more useful definition of knowledge is that it is about know-how and know-why. A simple non-business metaphor is that of a dish. An analysis of its molecular constituents is data – for most purposes not very useful. A list of ingredients is information – more useful – an experienced cook could probably make the dish – the data has been given context. The recipe though would be knowledge – written knowledge – explicit knowledge – it tells you how to make the dish. An inexperienced cook even with the recipe might not make a very successful dish. A person, however, with relevant knowledge, experience, and skill – knowledge in their heads - that is not easily written down - tacit knowledge – would almost certainly make an excellent dish from the recipe. Finally wisdom – well that's about knowing which dish to prepare! It is about wise judgement.

 

An important point to note here – to make knowledge productive – you need information. Knowing how to make a dish is not sufficient – you need information – the list of ingredients. And to make a wise decision you need information too – the likes and tastes of the consumers of the dish. So knowledge on its own is never good enough – you need information and knowledge – and of course “doing the wrong thing well” is also not productive – you need wisdom also.

 

Know-why is also important. Let us suppose you are missing a key ingredient of the dish – knowing why a particular ingredient was part of the recipe might help a knowledgeable cook substitute an alternative. In fact know-why is often more important than know-how as it allows you to be creative - to fall back on principles – to re-invent your know-how.

 

Having said that, if you discover a new recipe, a new way to make the dish, or something related with the organisation of the preparation, then you can surely be proud of yourself: this is a culinary innovation!

 

Now, let’s try to make the differences between creativity and innovation. Often we mix them up. Sometimes, they are merely seen as part of the process by which knowledge is developed and transformed into business value. This is a perfectly acceptable definition but again, like the failure to differentiate between information and knowledge, it is not very useful for practical purposes.

 

“Creativity is thinking up new things. Innovation is doing new things.”

~ Theodore Levitt ~

 

Indeed, a more useful approach is to view creativity as the process of generating ideas while seeing innovation as the sifting, refining and more critically – the implementation of those ideas. Creativity is about divergent thinking. Innovation is about convergent thinking. Creativity is about the generation of ideas and innovation is about putting them into action.

 

Creativity – coming up with new ideas - is not enough. We need innovation. This requires the application of existing knowledge and the development of appropriate new knowledge. Coming up with new ideas is the food of Innovation. Innovation is a far tougher proposition than creativity.

 

2. Innovation and free-trade economy.

 

Before analysing the very concept of innovation, let us outline the general frame in which innovation production and diffusion take place. What are the different ingredients composing a market? According to Porter’s forces well-known model, let us recall the market is governed by five major forces:

- The first force is that of the buyers. Towards them must be oriented all the efforts of the firm, particularly concerning modifications of switching costs, manufacturing processes, or the positioning of the products and services.

- Suppliers must also be taken into account. Because of their huge power of negotiation, they are able to weigh dull as far as supplying is concerned.

-Thirdly, firms must pay attention to the threat of substitutes, and to the fact that followers do not have to support the R&D costs in the production process, and thus are able to implement the innovative service or product at a lower cost.

-The fourth element playing a great role in the innovation environment is that of entry or exit barriers. Anticipating and managing if necessary the different entry and exit barriers should be one of the major preoccupations of the firms operating on the market.

-Last but not least, Rivalry among competitors has numerous consequences on the level of activity, as well as on the value chain, by increasing or lowering one or several structural elements of the market.

 

3.       Current trends…

 

Until now, the world economy, and more especially markets and firms structures have known a lot of major trends, from a technology push model, going through a market pull model (1960-1970), then to an innovation coupling and to networks firms’ current “fashionable” structure (1990-2000).

 

As a result, it is important to be aware of current economic trends as far as production and diffusion of innovations are concerned for a better understanding of the phenomenon. It seems managers have to cope with three major trends nowadays: the first one is the growing environmental pressure, due to the increasing competition in the business sphere. Globalization process is one of the explanations of this evolution.

The second trend is related to the time compression, between invention and innovation (i.e. invention plus commercialization). On the one hand, firms are faster and faster to create innovations, and on the other hand the speed of innovations adoption time is getting less and less long (To measure this evolution, McKinsey Consulting has created an index reflecting it. Comparing the Ford T and the DVD creation and adoption processes, the time compression calculated is 91%; Procter&Gamble, for its part, is using the ECR , i.e. Efficient Consumer Response linking producers, consumers and innovations, to measure this trend on its core business markets). This means time between the creation of an innovation product or service and its adoption by consumers has been divided by ten on average. Thus the “market pull” economy since the 70’s and 80’s has progressively given way to a “technology push” system directed towards innovation.

Thirdly, the number of new products or services directed towards consumers increases by 11% each years (Peters, 1997). This is due first to the growing number of mergers; more and more global firms pool the risks in order to win on all the markets and to benefit from different configurations. Moreover, this is related to R&D intensity and to the fact that top patenting company are based near high knowledge places, as Novartis implanted near the Route 128 in Boston.

 

To sum-up, innovation process has to deal with the more and more global shape of the environment, the need for fast life cycle innovations, and the interdependence of research and business institutions.

 

Now we have seen the general economic context, let us explore the core concept we are talking about.

 

II. What are we talking about?

 

“Innovation is the process of turning ideas into manufacturable and marketable form.”

~ Watts Humprey ~

                                                          

What are we talking about? What is hidden behind this overused word?  Facing the incredible number and kind of innovations, one may be put in an awkward position with trying to classify the different existing types of innovations. In the following lines however we will divide innovation in three categories:

First ones are product innovations, related to the invention of a product, or to the improvement of the product characteristics, so that it is more adapted to purchase. It better takes into account the consumption behaviours, and the segmentation of the demand. It can thus deal with a concept, a technology, or a presentation. For instance, the Boeing 747 was a product innovation, because it brought a new concept, i.e. a plane with huge capacities, in a market that only proposed small or medium planes. A new product necessarily comes from a former strategic segmentation, expressed either by a segment creation, or the split-up or fusion of one or several segments.

According to the type of market and of technical capabilities involved in the process, different types of innovations have been singled out. The following table try to summarize them.

 

 

 

 

Technical capabilities

 

Preserved

Destroyed

Market capabilities

Destroyed

niche (Ford A, 1927), 6 different colours, 18 different models

Architectural (Ford T, 1908)

preserved

 

regular electric starter, 1912

revolutionary (metallic car-body, 1923)

 

 

 

Process innovations, related with the production process, generally led in the last few years to interchangeable, standardised and integrated assembly lines. For example the Toyota “kaizen” organization of production, which was implemented during the 70’s. Other example is the one of QB House, a Japanese firm which offers a two-minute made haircut in small specialised places.  On top of the door, three lights, green, orange and red, give to the potential customer an indication about the time he will have to wait (red means more than five minutes, orange between one and five minutes, green for less than one minute). In this case, innovation comes from a radical change in the process. Cutting the hair is usually a long process, with an established relationship- a socialization process- between the customer and the hairdresser. This standardisation aims at targeting a new segment of the population, especially people who want a fast anonymous and efficient service. That is why this innovation perfectly matches their needs.

 

Finally, organizational innovations give to the firms a corporate structure adjusted to the market needs and capacities. Examples of former organizational innovations are numerous. For instance, in the 90’s, “make to order” or multi-functional “matrix groups”, coupled with the environment and the market organization were implemented in order to improve productivity and efficiency. A typical example of an organizational innovation is the one given by the role of the State in Singapore during the last few decades. Whereas one could argue that with the ongoing globalization, the State is more and more weakened in his control over cross-border flows of products and services, Singapore, by implementing a strategy known as “complementary assets” whereby the State tried to attract MNC’s and their flows of foreign direct investments, has shown that the role of the State in the next years will consist in determining competitiveness of nations as an agent producing a efficient frame to business activities. For example, the State in Singapore, which perfectly understood the “power shift” between mobile factors and less mobile factors in economic growth, invested in the creation of a network of “government-linked companies” (GLCs), filling business areas where MNCs were not interested in investing. Through this action, it increased the geographical value of its country.

Other example of recent organizational innovation is the fashionable “open space” organization. What used to be an inhuman and standardised kind of organization, adapted to the 70’s production oriented model, has been thought again; No more walls and private offices, no more specific place for each employee. Open space are now designed and used to cheer-up better circulation of information, creativity and exchanges between the employees. No more “departments”, give way to an innovating corporate “melting pot”!

 

For the three types of innovations we have defined previously, there are two degrees of innovation: it may be either radical (entirely new product or service category and production delivery system) or incremental (innovation is due to the adaptation or refinement and enhancement of existing products and services).

 

 

 

III. Strategy and Innovation

 

Now that we have seen the different existing types of innovations, let us have a look at the different implementing strategies involved their diffusions.

 

What are the links between innovation and strategy? Researchers agree on this subject to say that there is a capitalizing relation between them. More precisely, in the one hand, technology cultivates strategy whereas on the other, strategy drives technology. The two concepts work together in order to produce more value.

 

To establish a profitable strategy, managers have to choose in which direction they want to gain a competitive advantage on competitors by creating value. For that, firms must determine three main positionings:

-The choices of products and services offered to the consumer.

-Technical and economical choices related to the conception, supplying, production, distribution of these products and services.

-The choices of organisation and information system adapted to this general frame.

 

      1.   Market Strategy

 

After the phase of creation, new products have to be adopted by consumers. This adoption process relies on a “life cycle”, composed of various stages (knowledge, attitude, decision, implementation, confirmation). To benefit from the product’s life cycle, innovating firms have to pay attention to the diffusion of innovations. This one takes place within a social system embracing many different situational fields. The five categories, innovators, early adopters, early majority, late majority and laggards may each be regarded as a situational field.

The dominant value of innovators is venturesomeness. They appear to gain interpersonal security by being more venturesome than other members of a social system. Then come early adopters (early majority), who take more time to deliberate on adoption decisions. Finally come the late majority, more sceptical about innovation, and laggards, the most traditional of the social system. They are all parts of the firms’ target, but they will not have the same attitude towards a product or service. They will then take more or less time to buy or use it.

 

Mainstream users have a stronger perception of the risk involved by innovation. After early buyers have purchased the product or the service, different phases take place: the Bowling alley (i.e. the product become popular), the main stream, characterised by a mass-purchase, and the end of life. Of course, for one product exists one typical product life cycle.

 

To anticipate these evolutions, firms must decide in favour of a high reactivity in the processes of design (the products that innovate clearly must do quickly to satisfy the needs of the consumers), a simultaneous engineering (project groups), to increase reactivity and an incremental development to foresee the future of the products.

 

    2.   Organisational strategy: What is a stage-gate process?

 

In order to better benefit from an innovation, firms have to adopt a specific process, named stage-gate. A stage-gate process is a conceptual and operational road map for managing the new-product process. The successive stages involved in an innovation process are the following: evaluation of new collected ideas, choice of the concept, development, implementation, and launching phases.

 

More particularly, a stage-gate process is composed of five steps giving a rhythm to the innovation production.

Stage 1 includes scoping plus a fast investigation of the project. Stage 2 deals with detailed investigation of the project and the building of the “business case”. Stage 3 concerns design and development phases, added to the definition of manufacturing and operating processes. Stage 4 makes testing and validation processes possible. Finally, Stage 5 consists in the launching and full commercialisation of the product or the service.

Payoffs of the Stage-Gate Process are improved teamwork, less recycling and rework, improved success rates, earlier detection of failure (i.e. less costs) as well as better launches.

 

Key success factors of new products development include proficiency of pre-development activities, such as initial screening, detailed market study, but also protocol implementation, regarding target, customer’s need, as well as proficiency of market-related and technological activities.

 

Risk of failure (overestimated market, underestimated competition, not well designed, not well positioned) of products innovations may be contained thanks to specific organizational innovative implementations, summarized in the following table.

 

Different types of organisation

Corresponding teams

functional model

light weight

Matrix model

heavy weight

Divisional (by products)

Tiger

                       

3.       Knowledge Management

 

Stage-gate process is one of the elements of a greater current trend: Knowledge Management, which includes creation, production and diffusion of innovations. This kind of management is quite new, and considers the whole value created by a firm relies on its capacity to manage mobile assets, more particularly knowledge.  A common definition is “the collection of processes that govern the creation, dissemination, and leveraging of knowledge to fulfil organisational objectives.” I prefer a more useful definition: “Knowledge Management is an emerging set of principles that govern organizational and business process design, as well as specific processes, applications, and technologies that help knowledge workers dramatically leverage their creativity and ability to deliver business value”. Although verbose – I feel this puts focus and responsibility on the individual – the knowledge worker - and on the holistic nature of knowledge management.

 

How to consider this holistic vision:

 

“No one asks you to throw Mozart out of the window. Keep Mozart. Cherish him. Keep Moses too, and Buddha and Lao Tzu and Christ. Keep them in your heart. But make room for the others, the coming ones, the ones who are already scratching on the window-panes.”

~ Henry Miller ~

 

Finally, many people think the term “Knowledge Management” is an oxymoron – as you cannot “manage” knowledge. Well you clearly can manage some aspects of knowledge. You can manage explicit knowledge captured on paper and in electronic databases in the same way you can manage information. But where the term “management” is inappropriate in its relation to tacit knowledge. Here knowledge management – in its creative sense - is more about nurturing than managing. It is more organic than mechanistic.

 

 

Conclusion: Ideas, Innovation, and value.

 

How to conclude on a concept that is constantly moving, and reinvented? Instead of doing so, it seems then interesting to open some tracks towards important related notions, giving another dimension to this notion.

 

 

 

   1. Where do innovations come from? Ideas.

 

What is an idea? An idea is simply “something” that is unrealised, unproven or untested. It can take many subtle forms. It could be an unrealised goal: “let's go to Mars”. It could be an unrealised product: “let's build a Mars ship”. It could be an unrealised service: “let's lay on charter flights to Mars”. It could be an unproven insight into the nature of things: “maybe there is a stream of particles flowing out from the sun". Or it could be a new unproven concept of how something might work based on new knowledge of a natural, social or business phenomenon: “the solar wind could power the ship”.

 

The realisation of an idea may be vision driven: “This is our goal. Let's identify and develop new knowledge to achieve it”. For example, “Let's put a man on the moon by the end of the decade.” Or it may be knowledge driven: “We have new knowledge. How can we apply it to the development of new products or services?” For example, “We understand the workings of the atom. Based on this knowledge could we build a nuclear powered electricity generation plant”. Both forms are valid and both are visionary in their own way.

Sir William Bragg is quoted as once saying – “The important thing in science is not so much to obtain new facts as to discover new ways of thinking about them”. I think the same applies to business and our everyday work life – much of the time we don't need more information or brilliant new ideas - what we need is to think about the information and knowledge that we already have in abundance in new ways.

 

   2. What are innovations directed to? Create value.

 

The notion of value knows a perpetual migration movement towards a better fit between the business expectations and the evolution of the economic environment. Innovation, as any new product or service, leads to the creation of three values. Managers should always keep it in mind while thinking about launching a product.

The first one is the value of exchange, defined by the rareness of a product and the market. For a particular new service, consumers will have to pay a certain amount of money.

The second type of value is the symbolic or perceived value. Through the purchasing process, consumers estimate or imagine in their mind that the innovation purchased will have certain characteristics. Consumers “appropriate” the product or service they buy, and through this process, they humanize it.

The third and last one is the value of use. After having seen the economic value, and attributed to the product a perceived value, they will use it. This process will give birth to a new type of value, said “value of use”, different from the previous ones.

 

The value of a product or service is the sum of three distinctive sub-ones that are composing it. Regarding the commercialization of an innovation, this means innovators have to match the good mix between the three values. And adapt their ideas to the “contemporary market spirit”...

 

Innovators are inevitably controversial.

~ Eva Le Gallienne ~

 

 

David DUBOIS

Audencia Nantes. School of Management

 

References

 

  • Peters T. (ed.) 1997, The Circle of Innovation

 

  • Jang-Sup S. 2002, The Role of State in an increasingly borderless world

 

  • Cooper & Kleinschmidt, 1990, New products: the Key Factors in Success
This was an entry for The 2004 Moffatt Prize in Economics. See the contest rules for more information.

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