Theoretical concepts and practical considerations

Guest lecture by Todor Stoykov02/05/2012

How to define innovation?No single, uniform definition of the term

“innovation” existsOxforddictionaries.com: “a new method, idea,

product, etc.”Schumpeter (1934): Innovation is the realisation

of a new combination (or recombination) of existing cognitive and material elements

Freeman (1974): From an economic perspective, innovation is defined as the first real commercial transaction of a new product or process

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Why the need to innovate?The principal benefit of innovation is that it

provides a source of strategic advantage to enterprises

Tidd et al. (2005): Mechanisms through which innovation provides strategic advantage to an enterprise:Offering something no-one else canOffering something in ways others cannot match –

faster, lower cost, more customised, etc.Offering something others cannot unless they pay a

license or other feeChanging the basis of competitionObtaining early-mover advantages

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How are innovations generated?The necessary first step to innovation is

creativityA multi-factor model of organisational

creativity (Woodman et al., 1993):

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Employing the creative product to a business use (value appropriation) is what constitutes the innovation

What is being innovated?

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Product innovations

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Tablet PCs

Glaceau’s Vitamin Water

Service innovations

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Apple’s iTunes store

RIM’s Blackberry mobile service

Process innovations

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• Mining company: installed a computerised maintenance management system to enhance the performance of its equipment maintenance process

Business model innovations

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Low-cost airlines

…moving away from the industry standards

Innovating away from the competitionKim and Mauborgne (2004): Blue ocean strategy

Red ocean: an industry with defined boundaries where players try to outperform each other in a chase to capture a larger market share. Over time, prospects for profit and growth decrease, products become commodities, and competition turns the water bloodier

Blue ocean: creating an entirely new industry or redefining the boundaries of an existing industry. Demand is created instead of fought over, and the new industry provides ample opportunity for profits and growth

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Cirque du SoleilThe circus industry in the US and Canada

before CdS:A shrinking market where competitors tried to

attract audiences by securing the most famous lion tamers and clowns (traditional circus acts)

No significant alteration of the circus experience audience numbers decrease rising costs without corresponding increases in revenues a typical “red ocean”

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Cirque du Soleil (cont’d)How CdS approached the circus industry:

Offer the fun and excitement of traditional circus together with the artistic sophistication of a theatrical performance

Reevaluated the components of the traditional circus acts and found that many of them were unnecessary and often times too costly Animal acts “Star” performers Three-ring shows

Concentrated on what they found really makes people go to the circus (clowns, classic acrobatic acts, the tent)

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Cirque du Soleil (cont’d)Included new elements, borrowed from theatre

and other performing arts (ex. ballet) Each show has a theme and a story line Multiple productions based on different themes and

story lines (ex. Saltimbanco) Each show has an original musical score which drives

the performance, lighting, and timing of the acts (instead of the other way around)

By simultaneously decreasing costs and driving up buyer value, CdS innovated away from the competition and created its own “blue ocean”

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Key takeaways from the CdS case

Continuously question:What features of our current offering really

add to the client’s experience? What can be deleted? What new elements add value? Is the new offering necessarily more

expensive?

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IKEADIY furniture assemblyOptional services (ex. delivery)Sourcing from suppliers around the worldSeparate vending of components (ex. wardrobe

frame doors)

What is IKEA innovating? Product?Service?Process?Business model?All of the above?

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What is the degree of change which the innovation brings?

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Degree of change

One definition of incremental and radical innovations (Gatignon et al. (2002)):

• Incremental innovations: improve price/performance at existing rate of progress

• Radical innovations: advance price/performance frontier by much more than existing rate of progress.

Radical and incremental innovations: an exampleRadical innovation: the introduction of the

automobile

Incremental innovation: the models’ improvement over time

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The impact of innovations on firm competencesTushman & Anderson (1986) and Anderson &

Tushman (1990): Competence-enhancing vs. Competence-destroying innovationsCompetence-enhancing innovations: build on

the existing competences of the firmCompetence-destroying innovations: destroy

the existing competences of the firm Ex. typewriter manufacturing industry was

practically wiped out after the introduction of the personal computer and the text-editing software

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Innovating towards individualised experiencesPrahalad & Krishnan (2008):

Commodities solutions experiences individualized experiences

Particularly relevant in view of increasing speed / need to innovate away from competition

Ex. TATA Group (India): Tea: From plantation to individualized wellness /

health / beauty company (and from $ 0.20 to $20 per box ☺)

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Open innovationDefinition: getting hold of innovative ideas from the

outside world which could be applicable inside the enterprise

Powell et al. (1996): interorganisational innovation and networks with partnersBreakthroughs often the result of diverse network of

contributorsInternal and external knowledge are (often) not

substitutes, but complementary and reinforce each other over time

Firms that initiate and maintain diverse alliances and alliance experience, work themselves to the center of the ecosystem

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Open innovation (cont’d)A central position, as an active participant, helps

the company to get at the forefront of new advances, become an attractive employer, develop a common understanding & shared principles of cooperation with partners

Networks also reduce uncertaintyResult: medium- and long-term growth, success

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Some conclusions about open innovationDoing everything by yourself is a “broken model”;

tapping ideas/technologies/new products from outside

If you got your internal innovation process right, and the set of external strategies, you are still only half way. You also need the right processes, organization, capabilities for open innovation.

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…final remarkSuccessful innovation is about seeing the

right opportunities, even when you are not looking for them

How many passes does the team in white shirts make?

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ReferencesAnderson, Philip. Michael L. Tushman. “Technological discontinuities and dominant designs: A cyclical model of

technological change”. Administrative Science Quarterly, 1990

Freeman, Christopher. “The economics of industrial innovation”, 1974

Gatignon, Hubert. Michael L. Tushman. Wendy Smith. Philip Anderson. “A structural approach to assessing innovation: Construct development of innovation locus, type, and characteristics”. Management Science, 2002

Hill, Susan. Harry Barkema. Lectures for course MG427 “Analysis and design of organisational practices”. London School of Economics and Political Science, 2008

Kim, W. Chan. Renee Mauborgne. “Blue ocean strategy”. Harvard Business Review, 2004

Powell, Walter W. Kenneth W. Koput. Laurel Smith-Doerr. “Interorgazational collaboration and the locus of innovation: networks of learning in biotechnology”. Administrative Science Quarterly, 1996

Prahalad, C.K. M.S. Krishnan. “The new age of innovation”

Schumpter, Joseph. “The theory of economic development”, 1934

Tushman, Michael L. Philip Anderson. “Technological discontinuities and organizational environments”. Administrative Science Quarterly, 1986

Woodman, R.W. J.E. Sawyer. R.W. Griffen. “Toward a theory of organizational creativity”. Academy of Management Journal, 1993

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